GMG is a capital-light property-focused asset manager. GMG focuses on a narrow but clearly defined sub-sector of the Industrial property sector. After a near-death experience in the GFC, GMG has adopted a capital-light business model, which is being emulated by offshore peers. GMG has grown Assets Under Management (AUM) by ~4x since 2012, EPS by 3x.
Industrial sector pure-play. GMG is focused on industrial property in well-located urban infill locations. These properties often require development/construction, repurposing, and active property management that require large amounts of capital over several years. GMG’s capital-light model relies on capital partnerships which help fund GMG’s growth, whilst minimising the requirement for GMG to tip in equity.
Powered by e-commerce. Two powerful themes underpin GMG’s business model – the rise of online retail (15% of global retail sales) and supply chain optimisation. Both require modern logistics warehouses, in well-located urban locations. COVID accelerated both these trends.
Higher interest rates will likely slow activity...eventually. Falling interest rates over the last decade have provided a tailwind for almost all aspects of GMG’s business – customer growth, partnership investors, earnings (via rising valuations, and growth of performance fees), and lower financial costs. Higher interest rates are likely to have a dampening impact on GMG’s earnings growth. The timing of any impact remains uncertain.
Valuation premium, offset by strong EPS growth prospects. GMG has historically traded at ~50% PER premium to the sector, today the premium is ~45%, down from ~70% in 4Q20. The present operating environment remains exceptionally strong. This has resulted in EPS growth accelerating from a historic growth rate of ~10% pa to +20% pa in FY23e. The market looking for a 3yr forward EPS CAGR of 16%.
3 key investor issues
1) How long can earnings grow above trend? GMG has been able to grow EPS at a rate 2-3x higher than its A-REIT peers for over a decade.
The market is looking for 3yr forward EPS CAGR of 16%. In recent years, GMG has lifted its growth rate forecasts driven by underlying client demand for industrial property. We put this down to three key factors;
I. Structurally, the adoption of a capital-light business model that brings in thirdparty capital. This allows GMG to scale all aspects of its business, without the associated equity drag on GMG common equity. Since 2012, GMG has had the lowest growth in share count of any S&P/ASX REIT.
II. COVID-19 has helped accelerate client demand for modern, well-located industrial property. Work in hand rose from $5bn to $13bn between 2019-2022. This will likely take several years for GMG to develop new properties. Higher development earnings tend to supercharge group earnings given the large one-off nature of income. Whilst COVID has bought forward demand, there is a risk that development earnings growth slows as COVID demand normalizes. We see this as a 2024/25 issue for GMG.
III. GMG has intentionally divested ~$30bn of industrial property assets over recent years as the Group has optimized its portfolio mix. This is material considering the current ~$70bn of AUM. GMG has flagged that this process is now complete, and that should allow Investment Management earnings meaningfully to accelerate in 2023/24E.
2) What does a higher interest rate world mean?
In our view, lower interest rates have provided a material tailwind for the property asset class and for property asset managers. All aspects of property management have benefited; client demand, property valuations (cap rates for GMG has halved since FY14), transaction turnover, performance fees, and investor demand for property. Amazon (AMZN), GMG’s largest tenant, has been a direct beneficiary of low-interest rates which gave AMZN one of the lowest costs of capital to support its rapid growth globally. For GMG’s balance sheet, higher interest rates do not present a large challenge. Gearing for the group is ~7.2% (18.7% look-through basis) and interest rate exposure is ~84% hedged for CY2022 (79% look-through) – fades to 30% by 2026. In our view, GMG is well-positioned regarding interest rate exposure, with limited exposure to higher interest rates over the next few years.
3) Valuation considerations
GMG offers one of the strongest long-dated growth opportunities in the A-REITs. This makes GMG particularly sensitive to changes in inflation expectations and 10-year bond yields. The GMG share price has fallen ~25% since its peak in 4Q21 on higher interest rate concerns. GMG has upgraded earnings for FY22E twice over this period. GMG rarely trades cheap on traditional A-REIT valuation measures. With +60% of income derived from active sources of income – development, and investment management earnings – traditional measures are not appropriate in our view. Looking at earnings multiple, GMG currently trades at ~20x PER with is in line with the 10-year average, and below its peak multiple of 33x in 4Q21. GMG does not have a direct like-for-like comparative locally. GMG has historically traded at ~50% PER premium to the sector, today the premium is ~45%, down from ~70% in 4Q20.
Leading offshore comps Prologis (US), Segro (UK) and ESR (Asia) command large premiums to their domestic REIT peers. All three peers are less capital efficient than GMG, and in the case of Prologis, materially higher geared. Prologis and Segro trade at ~30% PER premiums to GMG.
Our Buy recommendation on GMG is premised on a continued period of business and earnings growth for the Group, not an expansion in the earnings multiple.
FIGURE 1: GLOBAL INDUSTRIAL-FOCUSED REITS: LATEST
Risks to investment view
The key risks to our GMG investment view are: 1) performance fee income may be more difficult to achieve in a higher interest rate environment; 2) a slowdown in the development earnings (~45% of earnings) as activity slows down following a period of above-average growth (partly-COVID induced); 3) GMG’s PER premium falls (~21x vs ~13x sector avg) despite delivering on earnings growth; and 4) any signs of a structural slowdown in demand/growth for well-located urban industrial assets would put pressure on the share price.
Investment view
GMG is a well-run global industrial property asset manager. Founder-led, GMG has a strong focus on capital efficiency. The Group has been at the forefront of the capital-light business model for property asset management for over a decade. This has allowed GMG to expand globally into selected industrial markets.
We rate GMG a Buy, attracted to the long-dated industrial growth thematic, and the strong industry position GMG has carved out globally. We see a multi-year period of elevated earnings growth driven by a period of increased development activity as key clients accelerate both eCommerce and supply chain optimisation.
A higher interest rate environment will likely slow performance fees, turnover-related fee income, and property valuation gains. This shortfall is likely to be made up of both development and property management income acceleration. In our view, the slower fee environment is now reflected in the share price, which is down ~30% from its peak and trading broadly in line with the 10-year average of 20x. We see limited earnings risk over 2022-24e from higher interest rates, or rising cap rates for GMG.
Outlook comments
Figure 2: GMG per has derated from 30x to 20x as global bond yields have risen
Figure 3: GMG vs ASX listed asset managers: GMG has close to double the fee base of equity-based asset managers
Figure 4: GMG stacks up favourably across with global peers on valuation, growth, and gearing.
Figure 5: GMG is expected to deliver sector-leading EPS growth over the next three years.
Figure 6: Development earnings are expected to continue to grow strongly
Figure 7: GMG AUM fee base has averaged ~0.8-0.9% of assets over the last decade.
Figure 8: GMG well positioned for higher rates, balance sheet gearing <10%
Figure 9: GMG PER ~20x, in line with the long-term average.
Figure 10: GMG commands a PER premium to the market given strong growth prospects.
Figure 11: GMG retains one highest ROE profiles in the A-REIT sector
Figure 12: GMG dividend has been held flat at 30cps since FY19. Earnings have been reinvested back into the business.
