Market Conditions
Industrial REITs remain the best-performing segment of the AREITs. A major market concern has been property value decline as cap rates expand. Currently, peer data is suggesting this has been far less significant than market expectations. Peer Industrial cap rate expansions have come in at ~32bps with a minor property valuation decline. Peer Dexus also recently sold an industrial asset for a ~7% premium, well above what the revaluations suggest.
Rental growth and strong occupancy have been the key contributors in offsetting cap rate expansion. Occupancy remains near 100%. This is likely to remain as the FY24 supply of industrial assets is expected to continue to lag demand. Goodman Group is well positioned to soak up some excess demand due to its ~A$13bn development pipeline. Industrial rents increased ~5.2% according to CBRE in 1Q23 with an expected ~10% increase to come (albeit not all will directly flow through to GMG’s NPI). CBRE stated that currently for every available prime asset, there are 3-5 tenants fighting for it.
Global Peer/Tenant Sentiment
International peers have seen positive FY24 EPS revisions as industrial rental growth globally remain robust. Peer Prologis has mentioned its occupancy is at all-time highs (and is expected to remain) and e-commerce penetration is expected to continue to grow at <1% p.a. for the next 5 years. The group highlights that high demand should continue to drive its longer-term development pipeline.
GMG’s key tenant Amazon (~13% of GMG’s NPI) continues to look toward expanding facilities despite the short-term lowering of its workforce. Amazon has stated that the group is looking to keep growing its warehouse count, particularly in the EU. Warehousing activity remains robust and the shift toward obtaining land continues to be increasingly competitive especially due to the rapid growth of industries like data warehousing. Goodman Group is venturing into the data centre space with ~30% of its development pipeline being exposed to the segment. This is another vertical that could help lift the diversification of the portfolio albeit on a marginally lower ROE.
Investment View
Given its strong industrial exposure, we still expect Goodman to outperform in the longer term. Cap rates continue to be less of a headwind than the market is expecting. There is potentially more to go with cap rate expansion but given the ongoing elevated demand of industrial real estate, we think it will be subdued. We see value at current levels and therefore re-affirm our Buy rating.
Figure 1: Global peers seeing broadly positive FY24 EPS revisions. Notably in the US.
Valuation Considerations
Goodman Group continues to trade at a ~1SD discount to its 6-year average. We use the 6-year average as it marks the ramp-up of Amazon’s operations & the widespread rapid incline of e-commerce penetration. The multiple has derated due to fears of 1). a slowdown in consumer demand causing falling occupancy, which hasn’t significantly eventuated 2). Fears on slower development growth, which has very marginally occurred, but is largely complete; and 3). Asset devaluations due to cap rate expansion, which is looking less and less likely to be an issue.
GMG trades on a P/FFO of ~19x, a ~3pt discount to its global peers. At current levels, the market appears to be discounting the ~10% 3yr forward earnings CAGR on operational headwind fears. Expectations are for Goodman to beat its FY23 guidance (which was already upgraded in May) given its conservative nature and the fact that rental conditions have continued to remain strong and peer data suggests that industrial assets are trading close valuations 6 months ago. The market will remain focused on the continuation of strong operating conditions through to the result as it will be a key determining factor for driving the beat. Till then the market may be hesitant to lift the multiple.
Figure 2: PER trading in line with the 10-year average and 1SD below the 6-year average (time since Amazon/e-commerce ramp-up)
Figure 3: Goodman Group P/FFO trade below global peers
Figure 4: Goodman Group has the highest 3yr EPS CAGR with the lowest leverage of global industrial REIT operators
Risks to Investment View
Investment View
We continue to see value in GMG as it trades at a discount to its global peers. Operational headwinds are proving less significant than market expectations and the industrial REIT segment is demonstrating strong structural growth. Dexus’ recent sale of its Industrial asset for a ~7% premium to its December valuation suggests that there might be upside risk on revaluation expectations.
Goodman Group is set to continue capturing the ongoing penetration from e-commerce as well as the rapid growth in data centre warehousing. We expect that longer-term this will provide the group with strong earnings growth momentum year-on-year.
Goodman group remain conservatively geared (~8%) at the lower end of the AREIT sector and is significantly below global peers. We expect GMG to continue to run its conservative leverage model as it has proven beneficial through the current rate hike cycle.
We reaffirm our Buy rating and see value at the current share price. We expect performance to be strong for the FY23 result given the robust recent industry data. Out of the AREITs, GMG remains best positioned to benefit front the growth of online business operations (e-commerce and data).
Figure 5: Gearing remains to the lower end of the target range with Look through still below target range and well below AREIT peers.
Figure 6: GMG occupancy remains strong with cap rates at the lower end of the sector
Figure 7: GMG balance sheet position is currently one of the best in the AREITs
Figure 8: ROE is significantly above the long-term average
Figure 9: Div yield has remained flat since mid-2022
