U.S. Markets close in 3 hrs 57 mins

Edited Transcript of GMG.AX earnings conference call or presentation 13-Feb-19 10:00pm GMT

Half Year 2019 Goodman Group Earnings Call

Jun 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Goodman Group earnings conference call or presentation Wednesday, February 13, 2019 at 10:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Gregory Leith Goodman

Goodman Group - Group CEO & Director

* Nick Vrondas

Goodman Group - Group CFO

================================================================================

Conference Call Participants

================================================================================

* Darren Leung

Macquarie Research - Analyst

* David Lloyd

Citigroup Inc, Research Division - Director & Analyst

* Richard Barry Jones

JP Morgan Chase & Co, Research Division - VP

* Rob Freeman

Macquarie Research - Analyst

* Sholto Maconochie

CLSA Limited, Research Division - Head of Australia Real Estate

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Thank you for standing by, and welcome to the Goodman Group Half Year Results. (Operator Instructions)

I would now like to hand the conference over to Mr. Gregory Goodman, CEO. Please go ahead.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you. Good morning, and welcome to Goodman's half year results for FY '19 and the outlook for the full year. Nick Vrondas is with me on the call.

Now turning to Slide 5. Goodman has delivered a strong first half performance. This is due to the fundamental strength of our portfolio and our development and management businesses, which have been positioned to take advantage of the structural changes we are seeing around the world. We generated operating profit of $465 million, up 10.4% on the same period last year, and operating EPS of $0.255, up 9.4%.

Our first half distribution is $0.15, up 9.1% on FY '18, and our statutory accounting profit is $929 million. This includes the group's share of the portfolio valuation gains, which equate to $597 million and has contributed importantly to 9% growth in NTA since the 30th of June to $5.05 per security.

We've also kept gearing low at 6.5% and have $3.1 billion of liquidity available, predominantly in cash, while the partners have $14.2 billion available in undrawn debt and equity. With this strong performance and a positive outlook for sustained growth, we're upgrading our FY '19 operating EPS forecast to $0.511, which equates to 9.5% EPS growth for the year.

Structural changes driving our customers' businesses have fueled the continued evolution of the industrial property sector and are delivering growth and further opportunity for our businesses around the world. Changes such as urbanization, technology advancements and e-commerce have had a significant impact and will continue to do so in the future.

Industrial real estate looks very different to what it did 10 years ago. Back then, and it seems a long time, our cities were smaller, consumers didn't use technologies such as smartphones or voice assistance to shop, and warehouses weren't centrally located with access to large populations. Well, we know, in the next 10 years, the landscape will look very different again, so what we need our real estate to be is flexible and adaptable to accommodate the demands of the future.

Today, urbanization sees the number of people in cities growing by 65 million every year. E-commerce is already growing at a double-digit pace around the world, but by 2030, it's predicted that about 75% of the global population will both have mobile and Internet access. This, coupled with advances in AI and big data, will only create an increase in consumption as predictive shopping and shipping become more commonplace. This also means that supply chain efficiency is critical for our customers' success, and there is increased importance placed on the location and role of logistics and warehousing space.

Our property fundamentals are robust and development completions very strong. Together, they are driving partnership returns, were expected to be in the mid-teens for FY '19 and significantly growing total assets under management, which are up 24% to $43 billion.

Location of our portfolio also saw increased customer demand over the half, sustaining occupancy at 98% and producing like-for-like rental growth of 3.2%. The positive customer demand, coupled with strong investor appetite, saw a $2.4 billion in valuation gains across the group and its partnerships.

Also, importantly, Goodman's work in progress remains steady at $3.6 billion across 68 projects in 12 countries. However, as customer demand continues to grow, this is expected to exceed $4 billion in the near term.

At this point, I'll hand over to Nick just to take you through some of the results in a little bit more detail. Nick?

--------------------------------------------------------------------------------

Nick Vrondas, Goodman Group - Group CFO [3]

--------------------------------------------------------------------------------

Thanks, Greg. So if we could all please turn directly to Slide 10 to look at the income statement. And we'll first cover the items of operating profit, which exclude the usual nonoperating items at the bottom right of the table. We'll go through those a bit later on.

Overall, FX movements have affected the translation of our income and balance sheet when compared to the prior period. So we'll call out the specific impacts as we go, so that way, we can isolate the underlying performances. In general, though, the low Australian dollar had a $17 million positive effect on the translation of our foreign-denominated income. But this was totally offset by high borrowing costs, which is what we would expect given our approach to hedging.

Looking now specifically at property investment income. This was down relative to the prior period due mainly to the sale of assets. So within the property investments, the direct property net rental income was down $22 million because of sales completed throughout the course of FY 2018. These sales included nearly $350 million of transactions in Australia and around $300 million in other markets, which were mainly in Brazil upon the formation of that partnership. The combined weighted average yield on the sales is around 6.5%.

Cornerstone investment income, on the other hand, grew by $11 million compared to the first half of FY '18. Part of the growth was due to FX, which accounted for $5 million of the increase. $4 million of the growth, however, was driven by rental increases. In recent years, income from our cornerstone investments has been constrained by our asset sales program, but that impact is now moderating. Our partnerships sold $2.5 billion in FY '18 and $0.9 billion this half. To offset this, they invested $3.6 billion in FY '18 and $2.2 billion this half.

Consistent with our strategy, these investments have been principally into developments that we intend to hold for the long term. They're expected to generate yield on cost of over 7% when completed. We're building out sites we procured over several years, and we're selectively acquiring new sites that may be improved in years to come. As a result, the group contributed nearly $400 million of new equity to our partnerships in FY '18 and $300 million in the first half of this year. This represents our share of the equity deployed alongside our investment partners.

Of the $300 million we deployed this half, around $100 million was into specific development partnerships, and the remainder was used to fund the activity in our core partnerships. The average yield on this new equity was around 4%, based on the latest valuations and considering the growing allocation of capital to development. With ongoing rental growth and income to be generated from the development assets, we'd expect our cornerstones to grow from here.

Management revenue grew 15% or $24 million when compared to the first half of FY '18. Again, FX was responsible for $7 million of the increase, and growth in assets under management accounted for $11 million of the increase. In addition, transaction performance fees were up by $6 million compared to this time last year. Performance fees contributed over $50 million this half, bringing total management revenue to around 1% of AUM.

Looking ahead to the second half, we're on track to significantly exceed $50 million of performance fees, which will result in total management revenue representing around 1.1% of AUM. With this ongoing growth in AUM and the strong performance of our partnerships, there's scope for further revenue growth in this segment.

Development revenue is up $30 million or 12% compared to the prior corresponding period. FX translation contributed $10 million. Aside from that, though, underlying project margins have improved, and we saw a slight increase in our development volume, which, together, drove $20 million of income growth. The proportion of work done in partnerships has been relatively stable, so we've continued to see a significant portion of the development gains appear below the line in our valuation results. This is driving AUM growth, stronger performance in our partnerships and it's helping us attract additional equity capital from our investment partners.

We expect development income to remain relatively stable in the near term, but there is scope for growth in coming periods if the current climate persists and our activity levels increase as we expect them to.

With respect to overheads, we're benefiting from the consolidation of our operations. On the face of it, overheads were up by $4 million, but this was due to the FX translation. The underlying expense growth was minimal given the stability of the business and the effectiveness of our remuneration strategy. Our aim here is continue to keep our fixed costs steady and increase the use of variable costs to incentivize and align our people. Given the caps we've introduced on remuneration and our tight strategic focus and the stability of the platform, we don't expect expenses to grow materially in the near term.

Our borrowing costs have fallen by $1 million compared to the prior corresponding period. As said earlier, the net effect of FX and market rate movements on gross interest was an increase of over $17 million, which directly offset the translation benefit to income. Offsetting this was the anticipated reduction in borrowing costs resulting from our liability management program of FY '18 and the repayment of certain bonds and loans in this half. Our WACD is below 2.5%, so we expect our borrowing costs to remain relatively low.

Our tax expense was stable apart from the FX translation impact, although we expect it to trend up over the next few years if we continue to grow profits.

As far as the nonoperating items are concerned now, we saw nearly $600 million of revaluation gains in the half, which represents the group's share of the $2.4 billion in gains across the entire portfolio of assets under management. Cap rate compression has continued, but we've also seen improved rental growth. We've seen a rising contribution to revaluations from the development work done in partnerships, which contributed over $100 million to the group's share of the gains this half.

Another customary area of difference between operating and statutory profit is the fair value adjustments of part of our foreign liabilities and hedges. This showed a decline in value of about $50 million this half, with the FX component down nearly $70 million, whilst the interest rate component was up nearly $20 million. However, the decline was offset by the gain of $130 million on the translation of the assets we're hedging. This gain is reflected directly in the balance sheet and in the foreign currency translation reserve but doesn't flow through the income statement. So the net overall effect of the FX movement has been minimal as a result of our hedging strategy.

As is 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. The growth in the accounting expense was in part driven by an increase in the number of securities and in part by the increase in our stock price per security.

A few remarks now regarding the balance sheet on Slide 11. The increase in investment property since June 2018 was driven almost entirely by revaluation gains with minimal cash-based movement. Our cornerstone investments in partnerships, other than those with a principal focus on development, were up by around $800 million over the half. $450 million of this movement came through the revaluation gains, and the remainder was split between increased investment of around $200 million and FX translation of $150 million.

Compared to June 2018, our development holdings have increased by nearly $150 million overall. Our directly held capital is slightly lower at just under $1.5 billion, while our share of the capital investment in development partnerships is up by nearly $200 million. Within that increase, around $100 million was through cash investment and the remainder was the result of valuation gains and FX translation. We continue to expect the partnership development capital allocations to grow in line with our strategy.

As we've said before, the timing of partnership investment committee approvals and project completions and commencements will have an influence on the volume of development assets held directly on the group's balance sheet from time to time. In June 2018, for example, we had a buildup of assets ready to be sold. In December, we'd completed several sales, and we're just starting to build up again for June. So at this stage, it's likely that we'll have an increased development asset in June 2019.

Our cash position decreased over the half. This was partly due to the repayment of the remaining $240 million of sterling bonds and the debt in Brazil. And that's why our interest-bearing liabilities are also lower. To offset this, the translation of our liabilities due to FX movements resulted in an increase of over $100 million in the Australian dollar value of the remaining bonds. At the same time, we had an increase in the value of our foreign assets, and that is what you would expect and is consistent with our hedging strategy.

The FX translation of the debt contributed to over 100 basis points of the increase in gearing over the half. As outlined earlier, we also used $300 million of the cash to invest in our partnerships, but we also got the benefit of some $200 million in retained earnings.

You'll also note the absence of the minority interest in our equity this period. This relates to the Goodman PLUS hybrid securities that we repurchased in October 2017.

Slide 12 highlights our capital position. As we said before, we'll operate our gearing within a range of 0 and 25%, with the level to be set with reference to the mix of earnings. So we aim to maintain low leverage for the foreseeable future. In keeping with this, we've reviewed our distribution policy.

Given our desire to increase development activity and the consequential increase to our expected equity contribution, we have updated the target payout ratio in order to maintain a sustainable long-term funding structure. For FY 2019, we will be growing distribution per security by 7% to $0.30 per security. We're aiming to hold the DPS at $0.30 for FY '20, which should, subject to market conditions, enable us to reach the desired payout ratio in the low 50% range. From that time on, we would expect EPS and DPS growth to realign. We believe that on average, this will supply the group with around $100 million per annum of additional long-term funding. This will enable us to sustainably fund our proportionate interest in the assets we're developing for the long term. This strategy will help us to continue to deliver competitive rates of EPS growth for the long term.

That's all for me. Thanks, Greg.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Nick. And now slide -- turning to Slide 19. Our customers continue to experience considerable change, which is creating opportunities for Goodman. Most industries, including e-commerce, traditional retail and third-party logistics, are reevaluating their supply chains, which is driving the continued evolution of the industrial property sector. Our strategic focus on the infill market is being met with strong demand, which is generating long-term value. Barriers to entry remain high, but we have the management and the infrastructure built up over the long term to meet these challenges. Market conditions remain robust, with the shift towards increased automation, consumerism and heightened service expectations driving demand for industrial property in key locations.

So consequently, we're experiencing high levels of profitability, supported by these ongoing structural changes. We believe the opportunity to deploy capital at an attractive return is also growing. And as a result, FY '19 EPS guidance is being increased to $0.511 per share, up 9.5% on FY '18, and FY '19 DPS will be up 7% to $0.30 per security.

I thank you, and we'll now take some questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from Darren Leung with Macquarie Group.

--------------------------------------------------------------------------------

Darren Leung, Macquarie Research - Analyst [2]

--------------------------------------------------------------------------------

Looks like a good result all around. Can I ask you a bit more color around the FY '20 distribution? So Nick mentioned the $0.30 per share number sort of maintained in FY '20, so flat divi. But if I take like a 50% payout ratio as per your target, it implies an earnings per share of $0.60. As a start point, this is a massive growth versus FY '19. And then secondly, consensus is sitting at $0.54 at the moment, so how do you think about that 11% variance?

--------------------------------------------------------------------------------

Nick Vrondas, Goodman Group - Group CFO [3]

--------------------------------------------------------------------------------

Danny (sic) [Darren], we're not targeting exactly 50% payout ratio. To be clear, we're saying in the low 50% range, so 55% and below. So I think what you're inferring -- or imputing from that is probably pretty aggressive, I would say. And we're not giving guidance at this point in relation specifically to FY '20 EPS. It's a little bit too early to do that. But what we can say is that the business is in very, very strong shape. The drivers that we've outlined and going through the results and we're trying to give you a bit of a lead into next year suggests that the outlook's very good and condition's very good and the position's -- and the business is very well-placed. But we're not giving specific guidance on individual year. But long term, we're aiming to deliver competitive rates and EPS -- of EPS growth, and year-by-year, we'll update you as to what that means.

--------------------------------------------------------------------------------

Darren Leung, Macquarie Research - Analyst [4]

--------------------------------------------------------------------------------

Okay. What sort of payout ratio are you looking for?

--------------------------------------------------------------------------------

Nick Vrondas, Goodman Group - Group CFO [5]

--------------------------------------------------------------------------------

Yes, so low 50% range. And that will be fine because if you think about the earnings profile and what we're expecting, and in the low 50% range, that's an additional $100 million. And that's roughly where we need to be and want to be given the outlook for development growth. And so we're taking the steps this early to say we want to grow our developments, we're looking at the opportunities that are out there, we like them, we want to take them on, but we want to make sure we're fully funded for it sustainably as well. So it's -- the 2 are coming together.

--------------------------------------------------------------------------------

Darren Leung, Macquarie Research - Analyst [6]

--------------------------------------------------------------------------------

That's fine. And then I think we discussed at the August result, but for the investments business, should we think about FY '20 being the sort of first year where there's no asset sale dilution and there's underlying growth of 3% to 4%?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, look, Greg here. I think as we stated on the last call, I think it might have been the last quarterly, that the big disposition program over the last 4 or 5 years, which I think ended up around $14 billion, has been complete. We've repositioned the portfolio the way we want. So there will be some incremental turnover, there always will be, but I think the major repositioning of what we wanted to do is now essentially complete. So yes, I think you'll find the investment line over the next few years strengthens more in line with the rental growth, which we expect to be pretty good in the locations around the world where we are located as well. So I think this year it was, around the world, over 3%. So those sort of numbers are what you would expect over the next few years.

--------------------------------------------------------------------------------

Darren Leung, Macquarie Research - Analyst [8]

--------------------------------------------------------------------------------

And just a final one for me. On the Management business, what was the extent of performance fees recognized in this half?

--------------------------------------------------------------------------------

Gregory Leith Goodman, Goodman Group - Group CEO & Director [9]

--------------------------------------------------------------------------------

I think, Nick, you mentioned on the call approximately $50 million.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Your next question comes from Rob Freeman with Macquarie Group.

--------------------------------------------------------------------------------

Rob Freeman, Macquarie Research - Analyst [11]

--------------------------------------------------------------------------------

Sorry to harp on about Darren's question, but even if we say a low 50s payout, it means 52.5%, we're still talking about an earnings number of over $0.57, which is some 6% ahead of current consensus. I'm just trying to understand what's changed in the last 6 months just to see another kind of step change of that quantum, please?

--------------------------------------------------------------------------------

Gregory Leith Goodman, Goodman Group - Group CEO & Director [12]

--------------------------------------------------------------------------------

Look, I think Nick has made it really clear, we're not going to talk about forecast a year out, 1.5 years out from where we are now. I think the elements to our business, which are doing really well, which you can see in regard to the result of development, that will repeat in the second half; funds management, where we've had 5 years of performance that have been in the late teens, pretty well -- on average, in all our big partnerships around the world. Well, you can imagine that we are very, very -- that strong performance then comes with strong reward, and that strong reward will be over a number of periods and over a number of years. Now this is all things being equal, and as we know, the world is a volatile place and there's changes almost on a daily basis with trade and everything else around the world. So when we look out for this year, which is through to June, I think we've given you a very responsible and sensible forecast. I think what we're saying, we want to basically retain more earnings and we think we can get to our target, 1 year out from June, which takes us through to then the 2020 year. Now if you extrapolate that back and say Goodman is going to grow very strongly because we have made that statement in 2020, we're not saying we're not, we're just not putting a number on it. So I think we're going to leave it there.

--------------------------------------------------------------------------------

Rob Freeman, Macquarie Research - Analyst [13]

--------------------------------------------------------------------------------

Yes. No, that makes sense. And then just tied into that, it looks like operating cash flow of sort of $400 million was down on PCP. Just confirming that you expect operating cash to obviously revert in the second half. And then secondly, you're in an investing cash outflow phase again. So some $200 million of outflows in the period, asset sales done, you're out there buying. Where do you think gearing can land at the end of sort of F '20? And what is the current sort of internal thinking on the balance sheet, please?

--------------------------------------------------------------------------------

Gregory Leith Goodman, Goodman Group - Group CEO & Director [14]

--------------------------------------------------------------------------------

We all do gearing, one, and I think everyone knows my view on this leverage for Goodman. In regard to strong development growth, strong growth in our funds under management business needs to be at the low end, and we would expect 10% or below. Nick, in regard to cash flow?

--------------------------------------------------------------------------------

Nick Vrondas, Goodman Group - Group CFO [15]

--------------------------------------------------------------------------------

Yes. So the operating -- it's just you're right on the investment cash flow, so that's going to be net outbound. And we've discussed this in the past. I think if you look at -- in the past, we've had $3.5 billion of average workflow, and if you then take the proportion share of equity, we've been talking $300 million to $400 million per annum. Obviously, with that, looking like it's going to grow to over $4 billion, that will step up, and that's why we're matching the retained earnings target with the expected outbound cash flow from the investing side. In the short term, in regard to operating cash flows, the -- there's a number of things that typically happen in the first half, which do often skew the operating cash flow, and they're seasonal, particularly things like the payment of our coupons on our bonds, which come annually versus the P&L expense, which is obviously smooth over the year. Likewise, payments of STIs occur in the first half, but from a P&L, smooth, and the timing differences on working capital and receivables and payables. So that's common. The bigger driver will be our investing cash flow into our development assets in the inventory -- on the inventory line, which goes through the operating cash flow line. And as I said before, I expect, actually, in the second half that we'll have probably a buildup of inventory just looking at the timing of sales and investment committee approvals and development completions. So I think for the full year this year, it just so happens that probably that line will be probably net outflow, whereas last year, it was pretty strong net inflow. And it's just -- again, it's just these timing issues. But then it goes into FY '20, and again, I'd expect that then probably to reverse again in FY '20. But as I said that, I mean, that's why we use kind of the P&L to kind of help you smooth through that. So you've got to look at it maybe over a number of years rather than on a half-by-half basis, Rob. Hopefully, that makes sense and is consistent with what we've told you and what we've been doing in the past.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

Your next question comes from Sholto Maconochie with CLSA.

--------------------------------------------------------------------------------

Sholto Maconochie, CLSA Limited, Research Division - Head of Australia Real Estate [17]

--------------------------------------------------------------------------------

Just to round up the dividend thing which have been done a bit. But obviously, the target, $0.30 this year, $0.30 next year, and we just think about growing it. We have to grow earnings whenever we get our forecast out for the next 3 or 4 years. And when it gets to 50%, that's the sort of way to look at the dividend to grow in line with earnings. Is that the way to look at it?

--------------------------------------------------------------------------------

Nick Vrondas, Goodman Group - Group CFO [18]

--------------------------------------------------------------------------------

No. So I just want to be clear about this. So what we're saying is, and this is all other things equal, like if a meteorite hits the earth, things will change. But based on what we're seeing at the moment, we're saying $0.30 for this year, $0.30 for next year, and then we'll grow from the EPS and DPS. So it's just 1 year that we're pausing, and then we'll continue to grow. Now wherever we land as a result of that, as long as it's 55% or below, we're happy, and then we'll just grow from there.

--------------------------------------------------------------------------------

Sholto Maconochie, CLSA Limited, Research Division - Head of Australia Real Estate [19]

--------------------------------------------------------------------------------

Okay. And then just on the -- like-for-like was around 3.2%. Could you give some -- a bit more detail on the leasing spreads you're seeing across the geographies you operate in?

--------------------------------------------------------------------------------

Gregory Leith Goodman, Goodman Group - Group CEO & Director [20]

--------------------------------------------------------------------------------

Yes, look, it would be no surprise that the U.S. has been very, very strong, particularly in the markets. We're in the coastal markets. So they are obviously better than the run rate on the average, and they would be in the 4% to 5% range. I think good news is in Australia now, you're looking at 3s around the country. So certainly, in Sydney and Melbourne, where we're located, some of the infill markets have been stronger than that. China, bear in mind that we don't have a China portfolio. We have a Beijing, Shanghai, 80-odd percent of our portfolio. That's actually been growing at 5% or better, and there's been actually some -- the odd squeeze on supply, where demand has been 3, 4x supply, that's actually been almost double-digit. Hong Kong's been strong. Japan's been Japan. So I can put it in from 0 to 1%. That's about where you're at. And Europe, we see Europe in totality, including U.K., is more a 1% to 2% type market. U.K. in infill has been higher than that, but when you spread it out across Europe, that's where you come out.

--------------------------------------------------------------------------------

Sholto Maconochie, CLSA Limited, Research Division - Head of Australia Real Estate [21]

--------------------------------------------------------------------------------

All right. And then just on development. I know it, again, is timing. I noticed that the precommit for the WIP lowered to 54 from 64 and looks like that's coming from the Americas, which was 37 versus 69 at FY '18 and is a higher balance. Is that more because the U.S. is more a spec market? Is that what's driving that?

--------------------------------------------------------------------------------

Gregory Leith Goodman, Goodman Group - Group CEO & Director [22]

--------------------------------------------------------------------------------

Yes, it definitely is and where we're building as well. So we're not building in Dallas, in Atlanta or in Houston, in Chicago, where I wouldn't be expecting anything personally. But if you're in infill L.A., yes, so there's a bit of infill L.A., there's a little bit of Inland Empire in that when you got a vacancy rate of 1%. And then we're in the Asian markets as well. We're certainly in China. That's the case around, once again, where we're doing 80% of our work around the major cities as well, and there's a bit of Japan in that at Chiba, where we normally, as we finish a stage, we kick another one off. But the leasing on those programs is very, very strong and the demand is very, very deep with limited supply. So it's only in those markets. But I think the important number is the one on completions. So when we're completing, we're almost closing on 80% done, which I think is the, really, number to focus on.

--------------------------------------------------------------------------------

Sholto Maconochie, CLSA Limited, Research Division - Head of Australia Real Estate [23]

--------------------------------------------------------------------------------

And the completions were quite high, and like 2.1 is a big increase on the PCP on the 1 half '18. You talked about WIP going to $4 billion. Where do you see completions for the full year and WIP ending sort of for the full year? Do you have an indicative range there or...

--------------------------------------------------------------------------------

Nick Vrondas, Goodman Group - Group CFO [24]

--------------------------------------------------------------------------------

I think the completions are able to be in line with the sort of 3.5-type number. The issue around the commencements and where the WIP will be depends a little bit on timing of when we actually kick off or commit some of the big projects in Asia. So that's probably one of the bigger drivers of that. So look, if it's not -- if it doesn't go through $4 billion in June, it's highly likely it will go through, at some stage, in fiscal 2020.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

Your next question comes from Richard Jones with JPMorgan.

--------------------------------------------------------------------------------

Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [26]

--------------------------------------------------------------------------------

Just in relation to the EPS upgrade, is the bulk of that coming from cap rate moves that have boosted development margins and assets under management growth?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Look, I think you look at the numbers and you look at the face of the P&L and the detail, clearly, development's going very strongly and the management loan is going very strongly. So -- and we've stopped selling assets at the same rate that we're selling them. So if you look at the combination of the 3 in the second half of the year, it's a combination of good portfolio, good rental growth, the dilution that we were imposing upon ourselves by repositioning the portfolio that is, like I said, primarily complete, we are going to have a strong development number for the year. There's no doubt about that. And I think Nick's talked about the performance of the partnerships. So when you add it up, yes, it's a combination of things. It's not one specific item. It's a combination of things. And I think the good news is, I think, for the management team around the world, the plan and the strategy around the repositioning of the assets is paying off. And we think that will pay off into the future years.

--------------------------------------------------------------------------------

Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [28]

--------------------------------------------------------------------------------

Okay. And there's obviously been pretty sharp cap rate moves in the last 6 months. Just wondering if that's changed your performance fee trajectory that you've outlined previously.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Look, there's no doubt, I think I said a bit earlier, the partnerships are in the mid-teens in regards to performance. And I think over the last 5 years, I think we would have been mid-late-teens performance. When you start doing that with over $40 billion of assets around the world, that results in good performance. And that's what we strive to do, and that's why we sold $15 billion of assets over the last 5 to 6 years because that $15 billion of assets would have dragged on our performance, and that's why we did it.

--------------------------------------------------------------------------------

Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [30]

--------------------------------------------------------------------------------

So there's a kind of 100 this year and 120 next year. Does that still stand? Or are you kind of upgrading that?

--------------------------------------------------------------------------------

Gregory Leith Goodman, Goodman Group - Group CEO & Director [31]

--------------------------------------------------------------------------------

Look, I think we're not making a forecast about next year. I think this year, Nick's stated the number.

--------------------------------------------------------------------------------

Nick Vrondas, Goodman Group - Group CFO [32]

--------------------------------------------------------------------------------

Yes. So yes, definitely, this year will be above that. So yes, that's part of the reason for why we're upping the guidance for this year. We have said in the past, Rich, that we have the capacity to generate on a consistent basis 120, 125 basis points of AUM when you add the components together. And we're -- this year, we're not going to be at that point. So there's still scope for growth even on top of that, and that's probably the direction we're heading. So I mean, we have talked about that in the past, and I think the likelihood of that now carrying has increased.

--------------------------------------------------------------------------------

Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [33]

--------------------------------------------------------------------------------

Okay. Just one more question on that. Are you at a stage where your auditors are thinking about accruing for impending performance fees?

--------------------------------------------------------------------------------

Nick Vrondas, Goodman Group - Group CFO [34]

--------------------------------------------------------------------------------

The -- I mean, the way we've done this half, for example -- because you have to look at your position every time you report, obviously. But this half is a good example where we've got fees that were calculated or estimated as at 31 December but paid -- by the time we audit the accounts and then send the invoices out and get paid, months, 2 months, 3 months later. So this half, we have accrued for those fees for the European partnerships this half. So you've got to look at what's --it's virtually certain is really what we're looking at. And so in that situation, we've accrued for that income. And that's really the test. So every period, we look at that.

--------------------------------------------------------------------------------

Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [35]

--------------------------------------------------------------------------------

Yes. So I was referring to the forward-accruing fees that are coming in next year and year after.

--------------------------------------------------------------------------------

Nick Vrondas, Goodman Group - Group CFO [36]

--------------------------------------------------------------------------------

Yes. No, as I said, so you've got to look at them each reporting period and say, okay, is this virtually certain or not, in which case, you make that assessment. So at this period, December, we've made the assessment that those fees that will be paid in February, March time are virtually certain, so we've accrued for those.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

Your next question comes from David Lloyd with Citi.

--------------------------------------------------------------------------------

David Lloyd, Citigroup Inc, Research Division - Director & Analyst [38]

--------------------------------------------------------------------------------

Sort of a high-level question for you, Greg. Where do you think we are in the cycle given, I mean, such a strong result? And I suppose the natural question from investors, probably, are we getting towards the end of the cycle here? So if we were to use the analogy of the property clock with, obviously, midnight being sort of end of cycle and 6 being mid-cycle, where do you think we are at the moment?

--------------------------------------------------------------------------------

Gregory Leith Goodman, Goodman Group - Group CEO & Director [39]

--------------------------------------------------------------------------------

Look, good question. And let's just talk about where we think demand is coming from because I think when we're looking at business all around the world with so much volatility in all sorts of areas, right, and all sorts of property classes, including residential and retail and what have you, we're just looking fundamentally where the demand is coming from, where is the cash flow coming from, and do we have demand if we're buying a site as we did in Park Royal in London. A couple of nights ago, we bought it. Why? Because it's three deep of demand, and we can deliver it in about 3 years' time. So we're really focused on about 20 years out from now, and that's a really good example of that 10 acres that's going to be great in 20 years' time. It's got residential around it. It's got the urban sprawl or the urban conurbations in London growing, and that is just a great spot to park boxes and deliver it into Mayfair in 15, 20 minutes. That's a 20-year call, right? So we're not really about are we at a 5.25% cap or a 5.5% cap or a 6% cap or a 3.5%, right? What we're doing is -- when we're sitting down with our investors and saying, "That asset, good example. Next 10 years, we reckon we'll get you that and at about 20 years' time, could be something different." It's adaptable. It's got other opportunities apart from just industrial lease data sitting right next door, and then there's residential going up around it. That's the sort of stuff we're doing. So we're not sort of like trying to call a cycle. What we want to do is build really robust assets around the world. We want to build really robust cash flows. The reason we sold $15 billion in the last 4 or 5 years wasn't because we were calling it top of the cycle. We just believe we will do better with what we had at that point in time. And so we're not calling it a cycle. What we're doing is saying we want money into really good call locations with really great cash flows that we can sit there confidently with our investors and book good returns over the next 20 years is what we're about.

--------------------------------------------------------------------------------

David Lloyd, Citigroup Inc, Research Division - Director & Analyst [40]

--------------------------------------------------------------------------------

Okay. Cool. Can you just maybe touch on that Park Royal site? I mean, I think I saw the announcement of a 9.5-acre site or whatever it was. Can you give an end value on that one?

--------------------------------------------------------------------------------

Gregory Leith Goodman, Goodman Group - Group CEO & Director [41]

--------------------------------------------------------------------------------

It will be 10 acres leading up being GBP 130 million or something, building on them in bitty bits and pieces.

--------------------------------------------------------------------------------

David Lloyd, Citigroup Inc, Research Division - Director & Analyst [42]

--------------------------------------------------------------------------------

Sure. Okay. Just on your AUM, I think at the Investor Day last year, you put out a number of $50 billion sort of target. And I think most of the markets assume that would be around FY '22. Are you tracking ahead of those expectations at the moment?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

You can probably answer that question yourself.

--------------------------------------------------------------------------------

David Lloyd, Citigroup Inc, Research Division - Director & Analyst [44]

--------------------------------------------------------------------------------

Okay. Sounds like you possibly are. So you -- over that same time period, where do you think it is going now then? What was the trajectory if it's not $50 billion?

--------------------------------------------------------------------------------

Gregory Leith Goodman, Goodman Group - Group CEO & Director [45]

--------------------------------------------------------------------------------

Look, we're -- the other thing we do when we sit down and we're looking at what we're investing around the world, we're not painting it by numbers, and we're not going we have a target, right? But I think the fact of the matter is when you look at the rate of sales over the last 3 or 4 years, we were taking billions and billions and billions of dollars out around the world to reposition the portfolio. Then you look at the trajectory of the developments moving forward around the $3.5 billion, $4 billion mark or maybe above, 90% of that we'll be keeping. And we've got the capital, basically, over the next 2 to 3 years to put on another $10 billion quite comfortably. So you can sort of extrapolate out, all things being equal, which we know they might not be, right, but all things being equal, we'll fly through $50 billion pretty quickly. And all things being equal, yes, it's a big funds management business growing, yes.

--------------------------------------------------------------------------------

David Lloyd, Citigroup Inc, Research Division - Director & Analyst [46]

--------------------------------------------------------------------------------

Okay. And just last one, just around Brexit. Are you noticing any signs of Brexit in Europe and U.K. around delaying investment decisions or anything like that?

--------------------------------------------------------------------------------

Gregory Leith Goodman, Goodman Group - Group CEO & Director [47]

--------------------------------------------------------------------------------

Yes. Look, I think a really good question. I think it's still up in the air, isn't it? So once -- I go back to the fundamental structural changes in the demand. So we were seeing structural changes where people are making investment decisions for the next 10, 15 years around supplying the key markets of Europe. Whether it's in Germany or whether it's in the U.K., they're moving ahead with those decisions. We are seeing -- and where you're seeing bad decisions about getting costs out of businesses, those decisions are still being made because everyone wants to see a cost-out, Brexit or no Brexit, with automation and all the things we're seeing. So the structural stuff, not really. I think if you're just looking at people wanting additional warehouse because they're growing their business stronger and things like that, that's not structural. And I suspect there's a bit of a wait-and-see attitude. But thankfully, pretty well what we're developing around Europe and other parts of the world are in the -- as we've talked about this before, are in those infill markets where it's more structural in cost-out of business and it's not a maybe, it's now a must-have, right? If you want to be competitive over the next 5 years in the businesses our customers are in, they got to get cost out of their business. They've got to be more efficient. They got to use the space better. And we are seeing a ramp-up of money going into automation. We're seeing longer lease terms, and we're seeing three deep in core locations around the world, three deep of demand, right? So that's all about where you're at. Secondary locations, I think, is a very, very different story. And I think I'm on record of saying this before that don't believe industrial is linear. Not everything is going to be successful in industrial. It's not linear. It is going to be locationally focused. And it's about structural change, and that's what we should focus on.

--------------------------------------------------------------------------------

Nick Vrondas, Goodman Group - Group CFO [48]

--------------------------------------------------------------------------------

Sorry, David, I just want to add just one thing, just on the investment side of the equation as well. We have seen sort of a couple sites pop out as for sale, sites which ordinarily just wouldn't appear on the market or you just wouldn't see. But the flip side of that is there's been absolutely no shortage of buyers. So it doesn't look like there's a buyer strike at this point anyway in relation to that.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Except for the secondary stuff, I think. London M1 inside the M25, that's the ideal, right? Everything else outside that, that's not ideal. I reckon everything outside that is soft.

--------------------------------------------------------------------------------

David Lloyd, Citigroup Inc, Research Division - Director & Analyst [50]

--------------------------------------------------------------------------------

Okay. Just one last question about -- because obviously, with the step-up to $4 billion or thereabouts in development, I take it that's also a consequence of these larger developments around multi-story. I know that you've just done a double-decker in Spain for DSV. Just -- it didn't seem like Spain was really on the map for double-story warehousing at the moment. So is this becoming a little bit more widespread and prevalent than what we might have thought maybe 6, 12 months ago?

--------------------------------------------------------------------------------

Gregory Leith Goodman, Goodman Group - Group CEO & Director [51]

--------------------------------------------------------------------------------

Yes, a little bit of that is with the conurbation and the elevations of the land, so it's actually 2-tiered. So we're using the site with separate entries to create that double-story. So it's not your traditional stack-on-top scenario. But we're doing it where it makes sense. We're doing it where there's a real shortage of supply in the intensity of use, and we're doing it with the planners who are encouraging us to do it. And effectively, the governments are not allowing you to do anything differently, and China is a really good example. If you've got a block of land around Shanghai within a reasonable, reasonable is about an hour, shot at the city, there's no way you're going to be building single-story. You're not allowed to. So you got to go 3 -- 2, 3, 4. So we do it where it makes sense, and we do it where the customers basically will go there and use it and they will use it if they don't have a choice, quite frankly.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

There are no further questions at this time. I'll now hand back to Mr. Goodman for closing remarks.

--------------------------------------------------------------------------------

Gregory Leith Goodman, Goodman Group - Group CEO & Director [53]

--------------------------------------------------------------------------------

Look, thank you very much for attending the call.