Goodman has completed another successful year in which we continued to grow our business and ensure we are in robust shape financially and operationally to benefit from a number of transformational macro themes that are shaping the future and driving the evolution of the industrial property sector. This is an exciting time for the Group and I’m pleased to report on our activities and achievements in the 2016 financial year and how these are positioning Goodman for a strong future.
EVOLVING OUR BUSINESS
GROUP CHIEF EXECUTIVE OFFICER
Our performance during the year delivered 7.8% growth in operating earnings per security, demonstrating our conviction that the business strategy we are executing is the right one for the prevailing market conditions and will create long-term value for all of Goodman’s stakeholders. Our ability to achieve this comes from Goodman’s industrial property expertise, size and scale, and the extensive infrastructure we have in place around the world. Our operations span 16 countries and we have built a truly global business, with a virtually unrivalled operating platform and skilled team of people. This has enabled us to be innovative by identifying and adopting new trends early, ensuring that Goodman has always been a leader within our sector. The capability and resources we have amassed over many years provide Goodman with access to a wide range of quality opportunities, the experience to solve the diverse and changing property needs of our customers across a wide range of industries, and an investment offering that attracts significant capital from global investment partners.
A prominent backdrop to the last 12 months has been the ever growing prevalence of a number of macro themes that are driving the demand for modern, well located logistics space. They are underpinning significant change across the industrial property sector globally and the role that logistics and warehousing space has traditionally played.
These themes include:
- The trend toward greater urbanisation of our cities;
- The growth in consumerism, which is driving demand from our customers across a broad range of sectors from retail and pharmaceutical to automotive;
- The evolution of e-commerce and enabling technologies (such as mobile technology), which is changing consumer behaviour and driving greater investment in proven logistics locations, close to major urban centres and end-consumers; and
- The focus of our customers on getting more value from their property solutions and achieving cost efficiencies, which include consolidating operations, upgrading facilities, rationalising supply chains, greater automation and the use of robotics.
The quality and location of our properties have always been key factors in Goodman’s investment decisions and they define the composition of our overall portfolio of 412 properties. In the context of the themes transforming our sector, we continue to see ongoing growth in the quality and strength of our properties in and around major gateway cities and this forms the basis of our overall business strategy.
During the year, this was reflected in our focus on improving the quality of our properties and the income we earn from them. We did this by taking advantage of the high demand for modern, well located logistics space and selectively selling assets, with the proceeds reinvested into our development business. The continued strong demand for industrial assets resulted in $2.2 billion of properties (excluding urban renewal sites) being sold across the Group and our managed Partnerships in markets including Australia, New Zealand, China, the United Kingdom and Continental Europe. This sales activity has helped to fund our growing development work book, which increased to $3.4 billion at year end and remains a key driver of growth for Goodman.
The ongoing strength in asset pricing enhances our competitive advantage, given our ability to develop brand new logistics space in sought after locations, where land is difficult to obtain and demand exceeds available supply. We are able to replace existing assets at a forecast yield on cost of 7.8% with our own modern, high quality developments. This is reflected in the $3.3 billion of new development projects we commenced across our operating regions during FY2016, which is adding significant value and providing the best risk adjusted returns at this point in the property cycle. In turn, this is benefitting Goodman and our stakeholders by enhancing our overall portfolio and income quality and driving higher investment returns.
The Group continued to focus on managing the risk in its growing development business during the year through its disciplined and prudent approach to development. We did this by ensuring that we maintained a strong financial position, reinvesting the proceeds from our property sale initiatives and limiting speculative development to markets where there is an undersupply of new logistics space. Importantly, we are undertaking more development in our managed Partnerships and this is reducing the amount of capital that the Group is directly contributing to fund its overall development projects.
We completed another busy year in our development business, with Australia undertaking more than $700 million of projects in the key east coast cities of Sydney, Melbourne and Brisbane. The development activity we have underway reflects the shift by our customers toward reducing costs and improving operational efficiencies. Demand has been largely driven by the ongoing growth in e-commerce through the increased space requirements of third party logistics customers. We also secured a number of new commitments from domestic and international retailers, including Jewel Fine Foods, ALDI and Super Amart.
In our New Zealand business, customer demand is contributing to the ongoing strength of our development book in the key Auckland market. We announced 11 new projects during the year, which were mostly pre-committed to customers on long-term leases, including four projects at our flagship Highbrook Business Park.
Goodman maintained development volumes in China of 740,000 sqm, with our selective development approach targeting strategic logistics locations around key economic centres, including Shanghai, Beijing, Chongqing and Chengdu. Demand for quality space in these markets remains high, driven by domestic consumption and in particular, we continued to see strong interest from e-commerce, retail and logistics customers. This has achieved pre-commitment levels of over 50%, with good pre-leasing activity on our uncommitted developments, such as Goodman Qingpu Centre in Shanghai, which was 97% leased on completion.
The Japan market continues to experience strong demand for modern, high quality logistics space. The targeted development approach being undertaken by our Japan team is focused on prime, strategic locations around Tokyo and Osaka. Highlighting this, we delivered Stage 1 of Goodman Business Park in Chiba Newtown, Tokyo, a 117,000 sqm four-storey, multi-customer logistics facility, which has been fully leased. Following this success, we also announced the commencement of Stage 2 at Goodman Business Park, with strong pre-leasing interest for this 125,000 sqm logistics facility, which will have the same high specification as Stage 1.
In the United Kingdom, we maintained our development led approach, securing new opportunities during the year in proven, core markets. With the support of our global investment partners, we also launched the Goodman UK Logistics Partnership. The Partnership has already completed its first two projects, both of which have been fully leased.
In Continental Europe, our business continues to perform well, with development volumes remaining strong. Our work book was 623,000 sqm at year end. We have sustained this level of activity over the last four years and have been ranked Europe’s top real estate developer for the fifth consecutive year by PropertyEU magazine. Ongoing customer demand in sectors including e-commerce, retail and automotive underpinned activity in our key markets of Germany, France and Poland, achieving overall occupancy across our European portfolio of 98%.
The roll-out of Goodman’s development pipeline in the US gathered momentum over the year, with our focus on key undersupplied markets in Southern California, New Jersey and Pennsylvania. We made good progress in the Inland Empire market in Southern California, completing more than 160,000 sqm of logistics space and signing major leases with Amazon and Walmart. We also commenced over 200,000 sqm of new developments at our mixed-use development in Eastvale, securing a pre-commitment from Volkswagen for a new training facility.
In Brazil, we secured 100% of the operating platform, agreeing terms with WTorre to split our respective interests in the assets of the WTGoodman joint venture. We now operate as Goodman Brazil and our operations there are strategically aligned with the Group’s global platform. We maintain our positive long-term view on Brazil and are focused on selectively undertaking targeted growth opportunities, such as the pre-committed 62,000 sqm development for Walmart that was secured during the year.
Our stabilised property portfolio around the world experienced robust operating activity over the last year, with strong leasing results and ongoing high occupancy and customer retention levels. We achieved this through the consistent delivery of our customer focused offering and by ensuring that our properties are well maintained and presented. The quality, location and performance of our stabilised portfolio ensure that our properties are sought after by our customers and attractive to investors, which continues to support higher property valuations. Together with the strength of Goodman’s development activities, this was a major driver of the growth in our total assets under management during the year, which increased by 13% to $34.1 billion as at 30 June. This was largely due to the $3.2 billion of developments we completed and $810 million of higher property valuations across Goodman’s overall portfolio, with our urban renewal sites in Australia contributing approximately 33% of this valuation increase.
The Group’s urban renewal strategy continues to represent an important long-term opportunity and major source of capital for our business. It shows how investing in quality gateway city locations, where land is scarce and in high demand has, over time, prompted a change in use from industrial to residential, creating significant value for Goodman. Demonstrating this, we have sold and conditionally contracted $2.1 billion of sites, of which $800 million of urban renewal transactions were settled to 30 June, with a further $1 billion of settlements to occur in FY2017. We continue to maintain the momentum in our urban renewal activities by focusing on achieving positive planning outcomes on a number of sites, while also maintaining our current urban renewal pipeline in Australia, which is equivalent to 35,000 apartments.
Goodman has retained the strong support of global investor groups, who value our contemporary approach to investment management. This comes from our independence, governance and alignment of interests, with the Group investing alongside our partners. The Group’s specialist investment offering, development expertise and proven ability of our Partnership platform to deliver strong total returns and create value, are attractive to our investment partners. This saw an additional $2.3 billion of equity raised in FY2016, mainly for our Partnerships in China, Japan and the United Kingdom. This has bolstered the investment capacity of our managed Partnerships and provides them with access to quality opportunities not readily available in the market.
The strong performance delivered in the 2016 financial year reflects the range of operating activities and strategic initiatives undertaken across Goodman’s business globally. This has delivered full year operating earnings per security of 40.1 cents, an increase of 7.8% on FY2015 and operating profit of $715 million, up 9% on last year. This was above our initial 6% earnings guidance provided at the start of the year.
The total distribution we paid for the year was 24.0 cents per security, representing an 8% increase on last year and was in line with Goodman’s 60% distribution payout ratio. Payment of the distribution consisted of 11.9 cents in the first half of the year and 12.1 cents for the second half.
Goodman delivered an operating EBIT of $879 million, which is a substantial increase of 23% compared with last year. The robust result is mainly due to our continued focus on driving the organic growth of our business, the geographic diversification of our operating platform and the increased scale of our existing markets around the world, while also benefitting in part from a weaker Australian dollar. Reflecting the strength of the customer and investor demand for quality logistics properties globally, Goodman’s development and management businesses performed well, contributing 39% and 18% of operating EBIT respectively. The continued growth in the contribution from our development activities was a key factor in Goodman’s earnings outperformance for the full year. The contribution to operating EBIT by Goodman’s investment earnings was 43%, with stable investment earnings in line with expectations.
The value of our geographically diversified operating platform was reflected in the 59% of earnings contributed by Goodman’s international operations, with solid growth achieved in these markets.
Further information on the Group’s operations for FY2016 is available here.
Maintaining a strong financial position is an important part of Goodman’s overall business strategy, balancing our commitment to delivering sustainable long-term growth and competitive risk-adjusted returns with lower financial leverage. We are achieving this through our focus on selectively selling property assets across the Group and our managed Partnerships and reinvesting capital into our development activities to deliver growth in investment returns.
With our development business continuing to grow, having available capital to self-fund our development work book makes us less reliant on new capital, while helping to reduce our financial leverage. In turn, this positions Goodman to better withstand market volatility and to also take advantage of longer-term growth opportunities.
As a result, the Group’s gearing was 11.8% at year end, compared with 17.3% as at 30 June 2015. We expect gearing to continue reducing, as further capital is received from ongoing selective property disposals and settlements arising from the sale of urban renewal sites. Goodman also finished the year with total liquidity of $2.6 billion, providing considerable financial flexibility for the future.
We procured $3.1 billion of debt facilities during the year across the Group and managed Partnerships, mainly to refinance existing facilities. This achieved an average term to maturity of 4.5 years and pricing at current market rates, confirming our continued focus on extending debt funding sources and Goodman’s ongoing access to global debt capital markets.
Goodman is building a higher quality business for the long term. The success we have achieved over the last year shows how we are successfully executing our strategy, and our early recognition and understanding of the major macro themes and structural changes that are transforming our sector globally. With Goodman’s specialist industrial offering and geographically diversified operating platform, combined with the strength of our customer relationships and managed Partnerships, we are well placed to take advantage of the strong ongoing demand for modern, efficient and well located logistics space. We will focus on accessing the best quality opportunities in the best locations, to drive sustainable earnings growth for future periods and create long-term value for all stakeholders.
Our focus remains on improving the quality of our properties and income across Goodman’s portfolio globally. We will continue to selectively sell assets, although with $4.1 billion of property sales already undertaken over the last two years, this will be at a slower rate in FY2017. With development providing the best risk adjusted returns, we will reinvest sale proceeds into our development business, providing funding for the projects being undertaken by the Group and our managed Partnerships, and building the quality and strength of our properties in and around key gateway cities globally.
The progress we are making on our urban renewal strategy will generate considerable capital for Goodman, as further settlements occur in FY2017 and in future periods. This is driving our financial leverage lower and together with our property sales initiatives, is providing Goodman with significant financial flexibility and a robust balance sheet position.
In turn, the Group is well positioned for FY2017. We have a strong development business, with a significant pipeline of growth opportunities to deliver tailored property solutions for our global customer base and provide our investment partners with access to high quality, well located industrial properties. In turn, this will continue to grow our assets under management and drive the long-term growth of our earnings. Goodman is forecasting full year operating earnings per security of 42.5 cents, up 6% on FY2016 and a distribution per security of 25.4 cents per security.
I would like to express my thanks on behalf of the Board and executive management team, to all of our customers, investment partners and Securityholders for your ongoing support of our business. I also acknowledge the enormous commitment and effort by our team of people during the year in delivering this exceptional performance in FY2016 and thank all of you for your valued contribution. Through your dedication and hard work, we are able to achieve so much and build a truly great business for the long term.