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Edited Transcript of GMG.AX earnings conference call or presentation 12-Feb-20 10:00pm GMT

Half Year 2020 Goodman Group Earnings Presentation

Mar 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Goodman Group earnings conference call or presentation Wednesday, February 12, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory Leith Goodman

Goodman Group - Group CEO & Director

* Nick Vrondas

Goodman Group - Group CFO

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Conference Call Participants

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* Darren Leung

Macquarie Research - Analyst

* David Lloyd

Citigroup Inc, Research Division - Director & Analyst

* Grant McCasker

UBS Investment Bank, Research Division - Head of Australian Real Estate Research Team, Executive Director & Equities Analyst of Real Estate

* James Druce

CLSA Limited, Research Division - Research Analyst

* Richard Barry Jones

JP Morgan Chase & Co, Research Division - VP

* Sholto Maconochie

Jefferies LLC, Research Division - Equity Analyst

* Simon Chan

Morgan Stanley, Research Division - VP & Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Goodman half year results call. (Operator Instructions)

I'd now like to hand over to the CEO, Mr. Greg Goodman. Thank you. Please go ahead.

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [2]

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Thank you very much. Good morning, everyone. Nick is with me on the call this morning.

And I'll guide you now to Slide 5. Goodman's development, management and investment divisions all delivered a strong performance for the first half of FY '20. As a result, operating profit was $530 million, up 14% on the first half of '19; operating earnings per security, $0.288, up 13% on prior corresponding period; and statutory profit of $811 million.

Net tangible assets have grown another 4.9% since 30th of June, 2019, to $5.60 per security, while our gearing remains at 10%. This, combined with $16.9 billion of capital available across the group and partnerships, provides significant investment capacity and financial flexibility for the future. This result is driven by our focus on specific urban markets where e-commerce is growing, consumer expectations are rising, and the need for more efficient supply chains is becoming even greater.

We continue to build scale in our target markets, with total assets under management up 15% on the first half '19 to $49.2 billion. This was a result of strong property fundamentals, $1.6 billion of revaluations, $1.5 billion of development completions in the half.

Goodman Group's portfolio continues to deliver. We experienced consistently high occupancy levels at 98% and strong returns in rents with 3.3% like-for-like growth. Our earnings from investments were up 17% to $213.3 million as a result of development completions, acquisitions and increased investment in partnerships where we have invested almost $1 billion over the last 18 months.

Our development division continues to be a highlight with our workbook growing to $4.3 billion in the half, and we expect this book to grow and exceed $5 billion. Development earnings are up 10% with consistent margins and good future demand.

Limited supply of new developments in our markets, coupled with growing customer demand, has given the group the confidence to grow the development workbook. This confidence has been rewarded with longer-term leases, which are currently at 13.1 years on completion and 11.7 years on work in progress.

External assets under management have grown 15% since December '18 to $45.7 billion due to strong valuation gains, development completions and acquisitions across the platform. Management earnings are also up 16%, with performance fees expected to be strong for the full year, in line with the positive performance in the partnerships.

The competition for sites and undersupply of quality assets in our markets, combined with strong investment market conditions, has seen weighted average cap rates across the portfolio also compress by 17 basis points to 4.9% since June 2019.

Now I'll hand over to Nick to take you through some of the results in a little bit more detail.

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Nick Vrondas, Goodman Group - Group CFO [3]

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Thanks, Greg.

Now let's turn directly to Slide 10 to firstly look at the items in the income statement. I will cover the operating profit items first and then discuss the nonoperating items listed in the bottom right of the table.

Overall, FX movements have affected the translation of our foreign income when compared to the prior period. So we'll call out the specific impacts as we go. In general, the Australian dollar was lower over the course of the half when compared to the average over the prior corresponding period despite the late rally in December 2019. This had an $11 million positive effect on the translation of our foreign-denominated operating profit, excluding borrowing costs. This was offset by the impact on our hedges, which is reflected in our borrowing costs.

Looking specifically now at the movement in property investment earnings over the half year. Unlike prior years, the portfolio repositioning program was not active over the last 18 months. So the direct property net rental income was up by $7 million. This was mainly driven by the completion of developments with some underlying rental growth.

The other part of our investment segment is through our cornerstone interest. Here, income grew by $25 million compared to the same period last year. Part of this was FX, which accounted for $4 million. $6 million of the growth, however, was driven by rental increases, representing a 4% growth in return on invested capital, taking account of the limited amount of financial leverage in our partnerships. An increase in the capital allocated to our cornerstone investments has been the biggest driver of growth, accounting for $15 million of the increase. With the portfolio repositioning program less active in recent times and the progress made in executing our developments, we've been a net investor over the past 18 months.

Our partnerships sold $800 million worth of property in the half and $2.3 billion cumulatively over the past 18 months. More than offsetting this was the investments they made principally through development for long-term ownership, which totaled $2.1 billion in the half and $6.5 billion cumulatively over the past 18 months.

As a result, the group contributed its share of equity, which was a net $120 million of new investment into our partnerships in the half, nearly $520 million in the second half of last year and $290 million in the prior corresponding period. The average yield on this new equity was around 4.3%. With ongoing rental growth and income to be generated from the development assets, we would expect our cornerstone earnings to continue to grow from here.

Management revenue grew by 16% or $30 million over the first half of FY '19. Here, FX had a positive effect of $5 million. Growth in assets under management accounted for $16 million of the increase, and performance fees contributed $65 million this half, up $9 million from this time last year.

Looking ahead, we're on track to see a continuation of growth in management income with a very strong increase in performance fees likely in the second half.

Development revenue is up $27 million or 10% compared to the prior corresponding period. FX translation contributed $6 million of the increase. The remainder of the growth, $21 million, came mainly through the growth in volume of work in progress. WIP growth has more than mitigated the revenue impact of the longer development periods required for the larger-intensity projects we are undertaking. As we flagged last August, the visibility into our development earnings has improved as a result of the revenue recognition implications of our longer project periods and the introduction of the new revenue standard. We continue to be encouraged by the prospects for development growth, and we expect activity levels to increase materially from here, which bodes well for future revenue growth. We are well prepared for this, and we've been planning for it over the past few years. We've set and executed a deliberate locational strategy. We've been very focused on what we want to pursue. And consequently, we have had a very good success rate.

Our balance sheet is also in good shape due to the asset repositioning program, the distribution policy changes and our capital partnering. In addition to the direct benefits that will flow from our developments, we continue to undertake the vast majority of the developments within the partnerships, which will also drive AUM and performance-related income and grow our investment portfolio and, consequently, our investment income.

With respect to overheads, they're up $8 million compared to this time last year. FX translation accounted for $4 million of the increase. Other than the increased compliance costs reflected in the admin line, the remainder of our costs have been relatively stable. Our aim here is to continue to keep our fixed costs relatively stable and instead use variable costs to incentivize and align our people.

Our borrowing costs are up $10 million this period. The effect of FX was to increase our cost by $11 million. The reduction in capitalized interest and interest earned on deposits was offset by the impact of higher-cost debt we have repaid over the past 18 months and reduction in the cost of the floating rate portion of our interest.

Our current net WACD is a little over 2%, so we expect our borrowing cost to remain relatively stable, absent further material movement in the Australian dollar.

As we had already anticipated, our tax expense was up. Apart from the FX translation impact of $1 million, we saw an increase due to the growth in profits. We expect this to grow significantly in the second half based on the expected profit from the upcoming transactions.

As far as the nonoperating items are concerned, we saw over $350 million of revaluation gains in the year, which represents a group share of the $1.6 billion in gains across the entire portfolio of assets under management.

Cap rate compression over this half was less than that in the prior corresponding period, but rental increases have continued to drive appraisals. With the strength of the demand for our assets, we believe that positive valuation growth can persist in the near term.

Another customary area of difference between operating and statutory profit is the fair value adjustments part of our foreign liabilities and hedges, which were up $15 million overall. The late rally in the Australian dollar meant that the FX component of our mark-to-market movements was minimal this period, so the recognized gain was mainly related to the movement in the value of our interest rate hedges.

As usual, we also exclude the accounting cost of the employee long-term incentive plan, but we include the tested units in the denominator when calculating our operating EPS.

A few remarks now regarding the balance sheet on Slide 11. FX did not have much of an effect on the balance sheet when comparing December 2019 to June 2019, so we can just focus on the major drivers.

The increase in wholly owned investment properties since June 2019 was driven by revaluation gains of $26 million and $47 million of growth through developments. We had no acquisitions during the half.

Our cornerstone investment in partnerships, other than those with a principal focus on development, were up by around $530 million, over $350 million of this came through the revaluation gains, and the remainder came through investment. With the ongoing investment and further revaluation increases, we expect to see continued growth in our cornerstone interest.

Compared to June 2019, our development holdings are up marginally to just over $3 billion. Our directly held capital is up slightly, but this was in part due to the fact of the introduction of the new accounting standard for leases, which resulted in the addition of about $35 million of right-of-use assets for leasehold properties. We did add around $50 million of capital, too.

As we flagged before, we continue to fund the growth in WIP, which relates mainly to presold projects. But again, we note that this can vary depending on the point we are in, in the development activity program relative to the settlement process for new projects versus the older ones.

Our share of capital investment in development in partnerships on the other hand is down by around $80 million due mainly to the timing of completions compared to the expenditures for new projects. We expect that this will reverse in the coming periods.

Our cash position decreased by around $250 million since June. This was partly due to the repayment of over $100 million of loans, as you can see, with the reduction in interest-bearing liabilities. As outlined earlier, we also used over $300 million of cash to invest in our partnerships and developments. Offsetting this, we had the benefit of our retained earnings arising from the near 50% payout ratio.

That's a good point to turn to Slide 12, which highlights our capital position. As we said before, we'll operate our gearing within a range of 0% to 25% with a level to be set with reference to the mix of earnings. So we aim to maintain leverage at the lower end of our long-term range for the foreseeable future. In keeping with this, we reviewed our distribution policy in December 2018. Given our desire to increase development activity and the consequential increases in our expected equity contribution, we updated the target payout ratio in order to maintain sustainable long-term funding source.

For FY '19, we grew distribution per security by 7% to $0.30 per security. We are aiming to hold the DPS at $0.30 for FY '20, which should, subject to market conditions, enable us to reach a desired payout ratio in the low 50% range. This will enable us to sustainably fund our proportionate interest in the assets we're developing to hold for long term. This strategy will help us continue to deliver competitive rates of EPS growth for the longer term.

That's all for me. Thanks, Greg?

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [4]

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Thanks, Nick.

Now turning to Slide 19. The outlook for the -- for our business is strong. The real estate fundamentals in our markets are set to deliver sustainable and competitive growth through high occupancy and sustained rental increases. Performance of the development business continues to be driven by growing customer demand, with development activity expected to exceed $5 billion. The outlook for the management business remains positive, with total assets under management expected to exceed $50 billion by June '20 and future growth supported by growing development volumes and revaluations over the next few years.

So we had a very good start to the financial year. However, we are conscious that 2020 has presented challenges for many in our markets. We're also mindful of current global events and continue to monitor them closely. In particular, we are managing our operations in relation to the coronavirus conservatively and prudently. Our priority has been the health and safety of our people and customers, especially in China, where our business is being managed as safely and efficiently as possible.

Overall conditions in our markets, however, remain favorable for the long term, and we expect the ongoing benefits of structural changes to certainly continue. And as a result, we're increasing our forecast operating EPS for FY '20 to $0.573, which is up 11% on FY '19. The forecast distribution is maintained at $0.30 per security, as we have previously guided.

Thank you very much. Nick and I will now take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Sholto Maconochie from Jefferies.

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Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [2]

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Just a few from me. Just on the revals this half, what was the rental growth versus cap rate as a proportion of revals that's driving those strong results?

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Nick Vrondas, Goodman Group - Group CFO [3]

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Just roughly, Sholto, the rental growth was about 1/3, and 2/3 was cap rate.

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Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [4]

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Okay. Because you had some completions, which would have been quite strong uplifts to the year, okay, in rent. And then on -- I saw the announcement with the GNAP expansion of the commitment to $2.5 billion. There's no leverage in that fund, and the announcement said you've put some leverage in. What sort of leverage would you introduce into that fund going forward?

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Nick Vrondas, Goodman Group - Group CFO [5]

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Sholto, if you look at our other partnerships around the world and you look at the sort of targets that we have around leverage for those, which are strong investment-grade territory, which typically is 25% to 35% range, that would be pretty typical. I mean each case is a little bit specific, so we'll get to that point over time. I don't think we'll get there immediately. But over time, that's the sort of target we would expect, which would be consistent with a strong investment-grade credit rating, and then go to the senior unsecured debt capital markets.

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Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [6]

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So I guess sort of you're committed to that $1.4 billion, so you could fund that, a lot of it, with debt without having to increase your cash commitment. Would that be fair?

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [7]

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I think the activities we're seeing in the U.S. are actually pretty robust. So I expect over time -- and the reason for payout ratios and things of that nature, mean that we can actually fund our commitments going forward to the U.S. and other markets comfortably. And we're in a scenario where, I think, you look at the U.S. business, which is around, I think, $4 billion of assets under management, has got the capital, coupled with the debt capital markets to proceed to around that $10 billion mark. And I think that's pretty important as we move our U.S. strategy forward.

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Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [8]

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Yes. So that would sort of increased a bit in that market, too. And then I missed on the call, what were the performance fees in 1 half '20 again? Sorry.

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Nick Vrondas, Goodman Group - Group CFO [9]

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$65 million this half.

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Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [10]

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And what are you guiding for the full year, broadly? Can you give that number?

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Nick Vrondas, Goodman Group - Group CFO [11]

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Yes. Over $200 million.

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Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [12]

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Over $200 million. Okay. And just finally, this is a pretty strong result across the board. The -- you flagged at the end there, Greg, that you haven't seen any impact from global events. Can you confirm that there's been no issue from -- on the WIP and completions from corona and the other Hong Kong sort of issues earlier in the year?

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [13]

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Yes, I can confirm that.

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Operator [14]

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Our next question comes from Darren Leung from Macquarie.

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Darren Leung, Macquarie Research - Analyst [15]

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First one for me just in relation to your EPS guidance upgrade for the full year. Even just looking at [issuance] of the company in terms of your AUM target, that hasn't really changed. In terms of the development WIP target, going to $5 billion, again, hasn't really changed. Even your performance fee comment just then around the $200 million looks like it's sort of flat year-on-year. Can you give us an indication as to what in the P&L is driving that 2% increase, please?

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [16]

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I think the development business is very strong, as I highlighted in my opening comments. This is driving 2 things. It's obviously driving good quality assets under management, and stress good quality, because I think there's a lot of assets that are being traded around the world that we wouldn't put in that category. So I think it's the first thing. Second thing is we are achieving in the infill locations, which we're developing around the world, good returns, good margins. Once again, that comes down to the scarcity value and the opportunity to be able to develop those. So there's more demand than there are sites. So if you've got them, you're in pretty good shape. So it's primarily those 2 things.

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Darren Leung, Macquarie Research - Analyst [17]

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What do you think your development margins are completing out in FY '20?

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [18]

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Look, I think we're -- I'll hand it over to Nick. But I think we're good. We're pretty strong.

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Nick Vrondas, Goodman Group - Group CFO [19]

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Yes. I mean, as I said before, it's been over 20% for a couple of years now, and I think it'll be -- continue to be that, if not stronger this year.

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Darren Leung, Macquarie Research - Analyst [20]

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Okay. Understand. Can you -- just notice the partnership returns on your outlook slide, you've mentioned low teens, but I can't seem to find the metric for first half '20. Has this been removed?

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [21]

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It should be mid-teens. I think we're on track for June to 16% around the world, I think, on average.

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Darren Leung, Macquarie Research - Analyst [22]

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Your FY '19 number was 15.9%. I just noticed you haven't provided first half.

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [23]

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No, we don't have the first half. Guiding you to June, we would expect to be mid-teens or a little better.

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Darren Leung, Macquarie Research - Analyst [24]

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Doesn't your slide, on Slide 19, said low teens?

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [25]

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Well, it's going to be mid-teens by June. So I think James can correct that for you.

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Darren Leung, Macquarie Research - Analyst [26]

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Okay. Understand. And then the final one is just around GNAP as an extension of Sholto's question. How long do you expect that $3.5 billion equity commitment to sort of fall through? Is it over the next 12 months? Or is it more of like a 5-, 10-year trajectory?

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [27]

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I was, frankly, in the office this morning working very busily with the Americans. So look, I suspect, in an economy, in the U.S., which is actually performing pretty well in a global sense, and the whole size of the economy and the size of the projects, I think we'll be aggressive but sensible at the same time. But we're seeing some really good opportunities. So without putting a time limit on it, I don't think we'll be hanging about.

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Nick Vrondas, Goodman Group - Group CFO [28]

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We wouldn't expect it to be in the next 12 months, though.

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [29]

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No. Inside 3 years, you'll see the U.S. a pretty serious component of this business, we would have thought.

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Operator [30]

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Our next question comes from Simon Chan from Morgan Stanley.

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Simon Chan, Morgan Stanley, Research Division - VP & Equity Analyst [31]

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Your WIP, you're saying you're expecting to go from $4.3 billion to $5 billion by the end of the year. Can you just clarify for us which region you're expecting the massive step-up?

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [32]

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Yes, I don't know if it's massive. Look, I think we've said in excess of $5 billion. I don't think we said $5 billion in the release. I think it's the first point. Secondly, I think we've been talking about this for the last couple of years. As we've been buying and operating in the urban markets around the world, every meter of space you're developing is probably 2x what it was 4 or 5 years ago or even 3 or 4 years ago, and that comes down to a value equation, demand, land values and risk.

So I think it's -- incrementally, everything we're doing is more valuable. So I don't think it's a massive step-up. I think it's a logical progression in regard to the growth in value on a per meter basis, but locationally focused, and pretty well all the development we're doing around the world now that certainly we're retaining, let's put it in that frame. Everything we're retaining are in those urban logistics markets, and it is way more valuable, and you're getting really good rental growth. So I think it's a factor of that without some massive sea change internally. I think it's a logical progression, which, I think, Nick pointed to earlier in his presentation that we felt this would be the case. And I think we've been talking to you about this for a while that we can do more. We are doing more, and we will do more.

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Simon Chan, Morgan Stanley, Research Division - VP & Equity Analyst [33]

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Great. That leads me to my next question then. Your WIP by the end of the year in excess of $5 billion and then your AUM $50 billion, so that's about like 10% WIP as a proportion of AUM. Is that probably the right way for us to think about your business going forward? Because when you were $30 billion AUM, I think you were doing about $3 billion of WIP. Now that you're $50 billion, you're doing $5 billion. Can we think about -- if you get to $60 billion or $70 billion, then the market should think of, well, $6 billion, $7 billion WIP, in that 10% ratio?

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [34]

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Look, so let's wait and see. I don't think that's necessarily the way to look at it. But one thing I will say, the more assets you own around the world in regard to what we're buying around the world is giving us more opportunities. So as that funds under management grows -- let's say, it grows through the $60 million, $70 billion, yes, there is more opportunity inside those partnerships, in those assets to redevelop, go multistory and things of that nature. So there's a lot of competing uses on a lot of that product. So I don't -- I wouldn't draw the direct correlation. But it's fair to say, it's helpful.

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Operator [35]

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Our next question comes from Richard Jones from JPMorgan.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [36]

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Obviously, really strong development numbers. Just, Greg, I was wondering if you can touch on the stats in the half. I note the yield on cost looks really healthy. Just wondering if you can kind of comment on the mix within that. And is it Australia in particular that's driving the higher yield on costs?

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [37]

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Yes. Good question. No, look, I think it's -- Nick run this pretty much pretty broad-based, actually, to be honest. We've had a particularly good half. We've got some particularly good sites that, quite frankly, are competitively bid. So you've got one side of the development world, which if you're out in the farmland, there's 20%, 30% incentives going around. If you're in infill locations and urban environments, you line up 3 or 4 customers. I think that's the real stark difference in industrial at the moment. So if you have got land -- plenty of land available, plenty of developers available, incentives are big, and you've got to really compete hard. If you're in the urban environments, you're in -- you're where, in our view, we want to be, and it's a lot easier equation to drive better returns.

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Nick Vrondas, Goodman Group - Group CFO [38]

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Yes. And Richard, Greg is right. I mean it's pretty much consistent across the board. So there's no huge change in mix at this period. So it's the usual -- the big markets for us at the moment are Australia, Asia, where $2.5 billion of the WIP, the third-party funds is. So that's consistently strong at the moment.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [39]

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And then the ramp-up to $5 billion, do you envisage -- obviously, that's got some bigger projects kicking in, I think, in the U.S. and potentially in Hong Kong. Will that be dilutive, do you think, to the yield on cost number?

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [40]

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No, I don't think so. I think you'll find that what we're doing over the next 12 months will be pretty consistent where we are at the moment. I think the mix is going to be pretty similar. I think we are actually doing particularly well in Australia as well because we got land that's ready to go. And I think it's a massive advantage with -- out at Oakdale. I think we've got 50 pieces of machinery moving earth around at the moment because we want to accelerate some of the things we're doing out there.

So look, from our point of view, I think you'll see it'll be pretty consistent. And I wouldn't refer to $5 billion plus as a ramp-up. I think it's something, once again, Nick and I have been talking about for a while, and it's been a function of where we've been buying land deliberately and purposefully to put ourselves in a position where we can do lease projects, effectively make more money, but more importantly, own assets we want to own for the next 25 years.

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Nick Vrondas, Goodman Group - Group CFO [41]

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I think the one thing I will say, Rich, is that the quality mix is probably one thing that will -- that should be factored in. And as you go back a few years ago as well, in the infill markets, the risk is lower. The costs of land are higher. But obviously, the cap rates are lower as well because of the quality differential. So rather than a geographic mix, the trend is more around the quality mix, I think, is probably a better way to look at it.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [42]

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Got it. And then just in terms of the development earnings. Obviously, last year, you had a first half skew, and you've had a really strong first half year. How do we think about the full year in development earnings? Is there a natural first half skew? Or is...

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [43]

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Yes. Good one, Jones. Look, I think you'll find second half is going to be strong. So no, I don't think there'll be a skew.

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Nick Vrondas, Goodman Group - Group CFO [44]

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There's not typically any seasonal skew that's programmatic or anything like that, Richard. Just -- it's just the nature of when the revenues fall.

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Operator [45]

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Our next question comes from Grant McCasker from UBS.

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Grant McCasker, UBS Investment Bank, Research Division - Head of Australian Real Estate Research Team, Executive Director & Equities Analyst of Real Estate [46]

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Just 2 questions. Firstly, on the revaluations. Did you call out what was actually essentially like the unrealized development profits of the funds and then also Goodman's share of that?

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Nick Vrondas, Goodman Group - Group CFO [47]

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I don't think we did that calc this period. We'll give it to you at the full year again. But I think, look, expect on the full year, it's going to be pretty consistent with prior periods. So we're tracking around the same as prior periods. There was a contribution this half. I just don't have that number. We didn't calculate it for this result.

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Grant McCasker, UBS Investment Bank, Research Division - Head of Australian Real Estate Research Team, Executive Director & Equities Analyst of Real Estate [48]

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Okay. Great. And then just secondly, on the NPI growth of 3.3%. You continually talk about sort of increasing rental growth. When should we start to see that number picking up?

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [49]

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I think you'll find over the next 12 months, in the locations we're in, I think it should be okay. Look, that's predicated on some of my comments before. Obviously, with some of the macro issues around the world, I think you can expect a lower growth world. I don't think that's anything revolutionary you're hearing from this table this morning. So I expect 3.3% to 3.5% would be a good number in the context of global growth, inflation, bond rates and things of that nature. So I think it'll be 3.3% or better. But even if we can hold that in this environment, I think it would be a very good number.

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Operator [50]

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Our next question comes from David Lloyd from Citi.

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David Lloyd, Citigroup Inc, Research Division - Director & Analyst [51]

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Nick, just a quick question for you. Hopefully, a pretty simple one. I think just reconciling some of the comments on the call, I think you're calling out cornerstone income to continue to grow, on balance sheet income continuing to grow. We've got a huge skew in second half earnings from funds management. And I think, Greg, your comments just around development indicated there wouldn't be much of a second half skew, if any, in development. Then why on the upgraded guidance is the second half earnings projected to be lower than the first half?

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Nick Vrondas, Goodman Group - Group CFO [52]

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Yes. Look, probably the principal offsetting factor that I've mentioned earlier was the likely material increase in tax expense as well. That's probably the single largest factor you probably need to also include in your calcs.

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David Lloyd, Citigroup Inc, Research Division - Director & Analyst [53]

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But that surely wouldn't offset all the incremental growth out of those business units, is that right?

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [54]

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I think as we sit here today, in the world we sit here today, I think it's a pretty prudent forecast we put out to the market upgrade, at least just call 11% is prudent and sensible.

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David Lloyd, Citigroup Inc, Research Division - Director & Analyst [55]

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Okay. And just one other one for me, if I could. Just I think you've been mentioned in the press around the Qube's Moorebank site. Can you make any comment on that?

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [56]

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No. Look, I can't, mate. Sorry about that.

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David Lloyd, Citigroup Inc, Research Division - Director & Analyst [57]

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All right. And just sorry, I'll squeeze one last one, if that's okay. Just with regard to the -- your total portfolio, the AUM, are you able to sort of quantify maybe in percentage terms what of that portfolio would be classified as infill?

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [58]

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A lot of it. I'll get James working hard. No. Look, we've -- primarily, everything we're buying and everything we're doing in the U.S. is not infill today. Give it 10, 15 years at the end of its lease term, we'll be -- pretty well everything we're doing in Australia development is in that nature. What we're doing in China, quite frankly, most of it is in Shenzhen, Beijing and Shanghai. Once again, there's residential growing around us. We go into Europe, and we're doing a lot more now in Europe, in the major cities of Europe as well. Once again, give it another 5, 10 years, that will be infill, U.K., around the city of London.

So when you look at it and when we look at what we're developing, we look at what it is today. We look at the zoning around that, we look at what it's going to be in 10 years' time. So out of Oakdale, for example, give it 10 years, you've got -- you'll have more residential around it, which you're getting. You're going to have an airport out there, around it, which is going to be a benefit. So we've got a lot of it today. And then in 10 years, we think it's growing into it. And that's primarily what we're buying and what we're trying to do to future-proof our business in regard to what's happening with the urban environments, technology and other things of that nature, which is going to change our world as well over the next 10 years.

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Operator [59]

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Our next question comes from James Druce from CLSA.

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James Druce, CLSA Limited, Research Division - Research Analyst [60]

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Just one question from me. Can you provide a bit of an update as to the next stage of some of those big Hong Kong developments that you have?

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [61]

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Look, we've got one in WIP at the moment, and that's the only one we're planning for the moment in our numbers. That's a pre-let commitment that is going well. It's under construction, a big 15-year lease. And at this point, that is the only one we're contemplating during the course of this year and our projections moving forward.

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James Druce, CLSA Limited, Research Division - Research Analyst [62]

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And can you maybe comment on the following year or too early?

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [63]

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Too early. But look, I think we've got a lot of opportunity around the world, which is very strong, which gives us a very -- probably the best 3- to 4-year view we've ever had right at the moment where the book is bigger or the potential book is bigger. And I think, James, you mentioned something around $10 billion -- excess of $10 billion in regard to work in progress. Potentially, moving forward, it's probably -- $14 billion, $15 billion is the reality. And I think it's the highest number we've had sitting here talking to you in the history of the company.

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James Druce, CLSA Limited, Research Division - Research Analyst [64]

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Actually, one follow-up, maybe. There's a bit of talk around the U.S. pipeline, obviously, with some of the questions today. As a percentage of WIP, do you have any feel for where that would go? I think it was around 20% in FY '19.

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [65]

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Look, I think it can be consistently around 15%, 20%. But market's going to surge from time to time. There's a bit of -- there's a bit more structural change going on in some markets where a few markets are behind. So it's a bit of a surge. So you will get markets that surge where there might be a number of things you're doing at once, and then that will abate a bit as that structural change is completed. But it's definitely around the way people are living, it's definitely around major cities, and it's definitely around the -- the real change in regard to where people want to live is driving our development book pretty much in its entirety.

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Operator [66]

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The next question comes from Sholto Maconochie from Jefferies.

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Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [67]

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Sorry for the second question after being in there. I just wanted to ask, on the WALE, if you look at the development completion commencements and WIP, it's actually going up quite material on the leases by over 3 years on average. What's driving that? And does that mean you have different lease structures in terms of reviews and what people pay for those cash flows?

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [68]

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So the main thing that's -- obviously, the cash flows are incredibly valuable. It's the first point. Second point is the customers -- and this goes down the line of the structural change, the customers are just doing way more with their buildings inside. They're generating 10x more capacity out of the same-size building as they would have been 10 years ago through technology, material handling, systems, automation. So they're investing more in the building, and they want a longer-term basically to amortize those costs and take longer-term views.

I think also, if you look at our construction of our customers around the world, they're pretty top tier companies. And that also has strengthened over the last, certainly, 5 years as we've grown our international footprint that we've got some really, really, obviously, big customers globally, $1 trillion companies now. And effectively, they are taking a long-term view about their business, and they're taking a long-term view about what they want in their buildings. That's been the biggest change, and we think that will continue.

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Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [69]

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And if you do like a 10- or 15-year lease or -- do you have mark reviews at 5? Or how does that typically work? Are they all different to capture uplifts?

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Gregory Leith Goodman, Goodman Group - Group CEO & Director [70]

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They vary market-to-market. Some have got mark reviews at every 3. Some are CPI-based. Some are fixed-based. It depends on the customer and their own projections. But you are developing some really -- today, some really valuable cash flows over the long term, which is obviously advantageous to valuations and other things of that nature.

Thank you very much, everyone, this morning. I think that's the end of question time.