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Edited Transcript of GMG.AX earnings conference call or presentation 15-Feb-12 10:30pm GMT

Interim 2012 Goodman Group Earnings Presentation

Sydney, New South Wales Jul 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Goodman Group Pty Ltd earnings conference call or presentation Wednesday, February 15, 2012 at 10:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory Goodman

Goodman Group - CEO

* Nick Vrondas

Goodman Group - CFO

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Conference Call Participants

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* Paul Checchin

Macquarie - Analyst

* Sam Warwood

Merrill Lynch - Analyst

* Richard Jones

J.P. Morgan - Analyst

* John Kim

CLSA - Analyst

* Stephen Rich

Credit Suisse - Analyst

* Simon Garing

Merrill Lynch - Analyst

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Presentation

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Operator [1]

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Welcome to the Goodman Group half-year results conference. Hosting the call from Goodman today is CEO Gregory Goodman, and CFO Nick Vrondas.

(Operator Instructions).

We now welcome our first speaker, Gregory Goodman.

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Gregory Goodman, Goodman Group - CEO [2]

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Thank you very much. Good morning everyone and welcome to the Goodman results call. Firstly, if we turn to slide 5, operating profit after tax, AUD229 million represents a (technical difficulty) which the Group is very pleased with and it hit our financial metrics, around the operations and it exceeded, in certain areas. Europe was a stand out for us, which is good to see. Fully diluted operating EPS of AUD0.0305.

Distribution per security, as announced AUD0.018. Importantly, forecasting financial year 12, fully diluted operating EPS of 0.061, up 8% on financial year 2011. This is clearly right up to expectations and the second half is looking very good and very solid to meet that -- to meet that forecast. Another important program during the last six months, over the last months, in fact, is the evaluation of new markets that is being undertaken.

This is being undertaken in conjunction with capital partners importantly, and customers, where development capability, global brand, size and the scale will give us a competitive advantage. This is an ongoing process and I'm sure you will hear more about that later in this first half of the year. Also, we raised AUD600 million in new third party equity, in line with the half and we have a number of programs going on with major investors, at the moment, in about four different markets. So I think you will find, running through to June, you know, that will certainly exceed the billion mark. Operationally, we're very focused on development capital. That is the key ingredient to, obviously, the development of our assets around the world and the development capital we have had available through our big partners, also round the world. Debt capital markets are very important.

AUD2 billion of new facilities signed and Nick will talk a little bit more about that later on. Also, very conscious, reduced cost base and focused on cost control, so as we are getting bigger, more profitable, costs are a real focus, to keep in line and keep under control, to give us improving margins, as you see in the management business. You will also see that in the second half of the development business. On the development side, selective pre-commitments and pre-sold approach to development activities. 85% of all developments have been pre-sold, which is also part of our operating mantra and very disciplined about how we approach that. That result in gearing of 24.5%, with AUD1.5 billion of liquidity, which we want to maintain within the Group, to give us flexibility. Also today, we are announcing some capital management initiatives, which will adopt a more efficient global operating platform.

Firstly, proposing a five for one share consolidation and secondly, adding a Hong Kong staple to the Goodman structure. This is to cater for strong growth in offshore operating earnings. Strong growth we have through -- coming through currently, but more importantly, the strong growth and an operational earnings offshore, we would anticipate over the next three to five years. Turning then to slide 6. Under ownership occupancy running at 96%, most of the industrial product is running at around 98% and the office part, slightly under 96%, which averages us out at 96. We're seeing rental growth in Australia and New Zealand at 2.5% or better. Hong Kong, China, plus 10% and Europe, unsurprisingly, has been flat for the -- on an annualized basis.

We have at least 0.9 million metres of space across the Group, adding up to AUD92 million in property income and we have a stable valuation around the investment properties, with invested demand for A grade product at a very, very strong level. Importantly, in the development book, work in progress of AUD2.1 billion, 58 projects, 13 countries, forecast yield close to 9%. This is very maintainable, and in fact, it's growing. And I will talk about new markets, but with new markets, that would be looking at a run rate of more, like, AUD2.5 billion. Development commitments are AUD0.9 billion for the half with 86% pre-committed and 72% pre-sold. China and Japan land bank strategy, we're now getting the benefit and moving forward, certainly into 13 -- 14, commitments accelerating through AUD500 million during that period.

European operations commenced over a million metres of development in calendar year 11. That would put us number one developer in Europe, currently. Interlink, very happy to announce they're through 99% occupancy and it reached practical completion at the beginning of this year. External assets under management, also growing with the activity and development business. Up to AUD15.3 billion and that forecast grows strongly in line with the development activity. I think I will hand over to Nick Vrondas now and we are shooting to slide 8.

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Nick Vrondas, Goodman Group - CFO [3]

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Greg and good morning all. So on slide 8, we show some of the key messages from the results. We had a good first half for both profit and activity and this can give us comfort that we can achieve AUD0.061 per security for operating EPS on a fully diluted basis for the full year. Slightly up on our previous AUD0.06 per item. Furthermore, visibility into 2013 earnings is building, as well. In the process of achieving these results and maintaining our core balance sheet discipline for round gearing, liquidity and pre-let, pre-sold developments. So turning now to slide 9 and a bit more detail, again, let me preface by reiterating that the slides throughout the presentation are consistent with what you have been accustomed to.

In particular, the items reconciling operating profit and reported statutory profit are summarised at the bottom of the table and further detailed in the appendices in a format that allows you to reference them into the published account. The usual items around valuation and mark-to-market derivatives are the key features. There are two items that are not regular. One being provisions that we had made for acquisition costs at [CTA] which were not incurred and therefore released. Not including in our operating profit and the foreign currency translation reversal on our Singaporean business of AUD7.5 million. Outside of that, the underlying operating profit was, therefore, AUD229.2 million. The other feature that seems to have become a bit of a trend over the last few years has been the strengthening of the Australian dollar and again, the impact of that is that it lowers the translated Australian dollar value of our foreign EBIT, but again, this is offset by our hedges and that's no different how we have operated in the past.

So outside all of those items, we continue to see some pleasing trends, with respect to our underlying KPIs at the divisional level. Income returns in our investments continue to grow, as we benefit from rising occupancy and, in particular, the full period effect of quite a good surge in occupancy last year and underlying rental growth. Our return on assets of over 7% on an income is meeting our hurdles, when compared to reference rates by the different currencies. As Greg said earlier, our management services business continues to benefit from growth and continues to do so profitably. That's a function of cost control and I think, in particular, if you look at the emerging markets, where we have been less -- underwriting costs for a period of time, those benefits will really start to emerge going forward. Development volumes are growing at a rate faster than our working capital. Margins are stable, so our return on assets continues to grow. So that trend is heading in the right direction. Whilst we're pleased with these trends, we continue to see room for improvement and our emerging businesses, maintain scale and economies of scale and the developers -- continues to show development and we continue to unlock that potential. Turning now to the balance sheet on slide 10.

A couple of years ago, we set ourselves new financial risk management targets and disciplines. Our key credit metric target continues to be met and we aim to continue to operate at around these levels. We also continue to focus on pre-let and prefunded developments and again, that's been a feature of the results. Our relationship with strong capital partners in our funds are also well placed and that's a key part of our overall capital management planning. The key items for the half, again, the rise in the Australian dollar, serve to decrease the translated value of our foreign assets and liabilities. The rise in rents have caused an increase in stabilised property values, both on the Group and within the fund. We have had a decrement in land values in the UK and Spain, but overall, pretty small in the scheme of the overall portfolio.

Derivatives are flat overall, but FX has been up quite strongly, offset by interest rates for mark-to-market decrement, with a lower interest rate environment. As I said earlier, debt levels are at the levels we expect, as we normalise our development working capital, after we had a bit of a surge in cash in June from Interlink. You know, we are now operating at around the debt levels we expect to operate at this sub 25% viewing level. On slide 11 and further on capital management, we continued to have a focus on strong liquidity. Over the last six months, we've closed AUD1.7 billion in new bank line. The most significant of that was EUR800 million facilities closed in Europe, with European banks, late last year.

In what could be described as a difficult market, we're very pleased at the support and the relationship we have with those key financiers in that market. Further to that, debt capital markets have remained open to us and funds with AUD300 million of bond issuants over the half-year, as well. This ongoing strategy to lengthen and diversify our debt capital sources continues to evolve and you will continue to see us operative in those markets going forward. Our vigilance has been rewarded, as we've been able to continue to access the capital markets and been recognised by rating agents, who have taken a more positive tone to the Group and we'll continue to remain vigilant. Finally, a note, a little bit further on the capital management initiatives that Greg alluded to earlier.

You will see a number of housekeeping proposals around share consolidation, a share sale facility for small investors and a small security purchase plan, details of which will be forthcoming and are attached. At the same time, we will make some technical amendments to the corporate structure to include a Hong Kong entity at the top of the Staple Security structure. The structure will result in no change in the composite assets of the Group and the amendments will ensure that investors and financiers alike will see no real difference, other than increased capacity to release franking credits. For the Goodman Group though, it represents an appropriate corporate structure, in the context of our growing international business.

The benefit of having a company of substance based in Asia - in Asia, we believe, give us a best way to manage our tax risk and opportunities to benefit from the debt capital market in the future, as well. So all in all, a very pleasing path. A pleasing result. Good progress being and over to you Greg, for further comment.

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Gregory Goodman, Goodman Group - CEO [4]

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Yes, thank you, Nick. Moving to slide 13, in regards to investments. We talked about the occupancy of 96% up 1%. Retention remains high with large customers retaining space. A lot of expansions and extensions going on around the portfolios, as well, for the like on like rental growth of 3%. Good quality assets, and this is a bit of a theme around the property groups around the world, good quality assets are in short supply and development activity for us is the way we can get good quality assets in a supply constrained market. That's the key to growing and extending our funds management business, so that's - and that's going well, but the capital available for good quality assets with good income returns with solid covenant is very strong around the markets we operate in the world. Moving to slide 14.

We've been very active in the develop business in all markets. We have Japan development fund in due diligence, currently on the back of the Osaka site and a couple of other sites in due diligence. We have a strong pipeline in Japan and China and on target to deliver more than 500,000 square metres in the short term. We maintain work in progress of AUD2 billion, which is maintainable and growing, and with the introduction of new markets and opportunities, we see work in progress moving forward towards, then, through AUD2.5 billion on a longer-term basis. The China strategy is paying dividends. We've got additional 1 million square metres of land secured in the half, increasing the end value of developments to over $343 million and our capital partnering remains very, very attractive.

So the capital partners are joining us in the development activities, but also buying high-grade investment products. That is the key to the financing of the development business. If you turn to slide 15, there is some major development projects commenced. You will notice from all, strong covenants, good locations from Amazon in Germany, Stanley Black and Decker in Belgium, down to Australia with Woolworths and over to China with Schenker. In the UK, Daily Mail and Co-op are just completed or will commence. Moving to slide 16, talking about completions, once again, we've got gold star or very, very high quality covenants from Schenker, Metcash, DHL in Australia, Nippon Express through the portfolio. So the development is high quality, very good quality customers, good credit ratings and very desirable for institutional partners. Turning then to slide 17.

Importantly, the assets under management of AUD15.3 billion have increased during the period. The size and scale as a result of improved margins across the business, as Nick talked about and currently, we're looking at new and existing capital partners, who are diligent across four different markets. So we've got a strong pipeline of activity with equity partners going on currently, which we think will come through in the second half and certainly during the calendar year, which will place us in a very good position to grow funds under management strongly through the development pipeline that are coming through the business. Turning to slide 18, some of the management initiatives, you will see the European fund raise EUR350 million. Australian wholesale fund, as Nick talks about, that the unsecured note of AUD300 million and China, the equity commencement has now moved to 500 million and going very well.

Moving to slide 19, a snapshot of the funds -- still performing well and are in a healthy financial position. That then brings us to the - slide 21 and in closing, we are maintaining our position as a strong global industrial property and business partner in all markets we operate. We're looking at entering new markets, but adopting a low risk and capital partnering approach. Capital and customer is the key to that -- key to that approach. We're ensuring - we're ensuring we have size and scale in the markets we operate. That's obviously a big push over the last couple of years for Goodman, in our large market. Development capabilities are key, with a global customer relationship at critical advantage, as we build a global network -- global network. We've had positive equity commitments for real estate. Within Europe, we're the number one developer.

We're growing our commitment to greater China and Japan, where we've got very experienced management teams. The development demand continues to be driven by e-commerce flowing through three [field] operators and elements of the supply chain efficiency. So we're benefiting from global capital partners investing in specialised property operating business and Goodman as an operating business and has now a strong brand with those partners. We're well positioned for opportunities in new markets, which I've talked about and that will help us with our next stage of growth and link up our global customer offering. Very pleased to reiterate the full year earnings guidance of AUD0.061 per security, which is right on target and will put us in a good position for the financial year 13. I thank you and -- happy to go to questions.

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Transcript

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Editor [1]

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(Operator Instructions)

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Operator [2]

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First question comes from the line of Paul Checchin from Macquarie. Your line's open. Please go ahead. Mr Checchin, your line's open. Please proceed with your question. We will move to our next question. It comes from the line of Sam Warwood from Merrill Lynch. Your line's open. Please go ahead.

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Sam Warwood, Merrill Lynch - Analyst [3]

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Morning. The first question is just on the operating cash flow. It still looks a bit low at AUD140 million against the AUD229 million earnings and when you include the hybrid distributions, it still -- you know, you're paying out a little bit more than the operating cash flow. I'm just wondering if you could, sort of, comment on that? Where you expect the cash coverage to go in the future?

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Nick Vrondas, Goodman Group - CFO [4]

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Hi. Look, it's Nick Vrondas. People who have been following the Company for a while now would know that the investing cash flows contain some of our operating cash flows, because of the nature of the equity investments or the controlled entities taking a legal form that requires us to recognise the activity in the investment cash flow line. As a result, that creates a different -- and an anomaly. The other items that will typically show in the first half is the timing on prepayment of interest, in relation to our bond in the sterling market and that creates a difference. So if you adjust for those two key items, there are -- there is ample coverage on a free cash flow basis, so I'm happy to take that offline and walk you through in more detail, if required.

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Sam Warwood, Merrill Lynch - Analyst [5]

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Yes, sure. That comment on the difference between investing and operating cash flows, does that still hold true even though the special purpose development entities have been reclassified this period?

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Nick Vrondas, Goodman Group - CFO [6]

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That's only part of the -- yes, so we're making an effort to try to get a more consistent recognition, but there's still differences as a result of that. I think you'll find Interlink, for example, we got a big part of the cash last year and they're still - we had provision against the cost to complete and those provisions are now being released, so there's profit coming through. Cash already being received.

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Sam Warwood, Merrill Lynch - Analyst [7]

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Thanks, so that's a great segue, actually, into my second question which is just, in looking at the segment notes, you know, the Asia profit of AUD45 million, you know, revenue, from the on balance sheet stuff of AUD10.5 million and then an equity profit, I'm assuming that within that, sort of, AUD45 million is the Interlink profit recognised this period. I'm just wondering if you can, sort of, confirm that and also, if you're able to say how much profit in dollars was recognised this period?

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Nick Vrondas, Goodman Group - CFO [8]

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I confirm that that Interlink profit is contained partly therein. There are other parts where we do have some income recognition as well, but we -- as we indicated before, we do not speak specifically about individual projects or the profitability of any individual projects.

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Sam Warwood, Merrill Lynch - Analyst [9]

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Sure. Just one final question from me. I just want to confirm that the Osaka project that you will be commencing, I'm assuming that that's not yet in the new development commitments together quoted for the period?

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Nick Vrondas, Goodman Group - CFO [10]

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No, that's correct.

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Sam Warwood, Merrill Lynch - Analyst [11]

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Great. Thanks, guys.

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Operator [12]

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Your next question comes from Richard Jones from JP Morgan. Your line's open. Please go ahead.

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Richard Jones, J.P. Morgan - Analyst [13]

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Thanks. A question for Nick, if I can. Just the tax and the net borrowing cost, both look pretty light on in the first half. Are they -- are they reasonable ongoing run rates or is there, kind of, some, you know, first half benefits to -- that we'll see those numbers go higher in the second half?

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Nick Vrondas, Goodman Group - CFO [14]

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From a P&L perspective, I think if you -- you look at tax, you know, we -- that's a pretty good indication. We're going to be -- we're not really going to be paying a hell of a lot of tax in the immediate future. The interest or borrowing cost, you're best going to the notes of the account, Richard, and going through the gross -- the gross cost and looking at that. We do, obviously, have the benefit of the cross currency swaps, which we are benefiting from and with the currency moving the way it has, you can see that the EBIT impact at 6% weighted average movement is offset by the impact of the cross currency swaps, which is in that line and you can work through that, but you know, that can be up and down, but underlying that, the bulk of what we're talking about, in terms of interests costs is what you would expect.

A bit of extra interest income with cash on deposit, which is making the, sort of, net number -- sorry, the gross number look the way it does, at the moment. But in all, yeah, look you would expect that, you know, a borrowing cost through the P&L, you know, slightly higher than what we reported this half would be the normalised rate.

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Richard Jones, J.P. Morgan - Analyst [15]

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All right. Okay. Just following on the Interlink, there's obviously some profit recognition that's still is yet to be brought to account. Is that correct?

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Nick Vrondas, Goodman Group - CFO [16]

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Correct. Yes.

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Richard Jones, J.P. Morgan - Analyst [17]

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Okay, and then -- and just finally, just on ABPP, just, maybe, you can give us some colour as to where the vote is at and what you're thinking is there? Also, that the refin that is coming in June, I think.

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Nick Vrondas, Goodman Group - CFO [18]

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Yes. Look, ABPP will be -- the fund will be extended at this time and the refinance is credit approved.

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Richard Jones, J.P. Morgan - Analyst [19]

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Okay. That's sounding confident, cheers.

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Operator [20]

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The next question comes from John Kim from CLSA. Your line's open. Please go ahead.

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John Kim, CLSA - Analyst [21]

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Thank you. Greg, you talked about Japan a little bit in your opening remarks, but I'm just wondering if you could elaborate a little bit more as to the timing and potential announcement of any progress you made in Japan, given the -- given one of you -- the competitors have made a series of announcements in the last few months.

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Gregory Goodman, Goodman Group - CEO [22]

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Yes, we're not -- we're not too worried about what our competitors are doing, quite frankly, John. Look, I think, from our point of view, Japan's going well. We've got a quality management team that has just been through diligence with a couple of very, very large pension funds around the world that have got a big tick in regard to operation -- operational capability, which is important. We've got the Osaka site and a couple of others in due diligence, which will give us plus AUD500 million of development, but importantly, we are developing an A grade location. That's important with what we're doing around the world with China, whether it's Japan, whether it's Europe or other markets, and we are working that development fund up with a couple of major investors and we would suspect, over the next - over this half, that will be finalised. We are also working in with big customers and I met with a couple of them last week in Japan for pre-committing some of those developments to kick them off and you will all see the development of Nippon Express in your pack, which is 33,000 metres, we did in Tokyo and if you look at the financial metrics on that, I think the cash on cost was -- cash return on cost was somewhere in 7.5% to 8%, probably with a cap rate, you know, in the mid -- mid to high fives. So you know, there's good margins in it.

You've got to be careful you're not having a lot of rental growth coming through, so we're very focused on Japan and not being the biggest, so we want to be very good at what we do and we want to be an A class location. The other thing, too, on our fund up there, which is, you know, a billion of assets we do manage, that's just gone through a refinance and that's been done and all credit approved and there's a -- other investors looking to come into that fund, as well. So then we've got Japan, you know, where we wanted to get it. It's been a long haul, but we're now in a situation where that business I think over the next 12 months you'll be very pleased with as I'm sure we will be.

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John Kim, CLSA - Analyst [23]

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Do you foresee the Japan Fund being more of a joint venture or multiple investors like (inaudible)?

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Gregory Goodman, Goodman Group - CEO [24]

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Oh there's a big desire from some very large capital partners around the world to actually partner in small clumps, so I expect that you'll find that there's a lot of desire from some of the very large investors to have fewer investors and to put in more capital and the appetite of investors to put capital into A grade locations -- and I stress they've got to be A grade and good quality products -- is very strong on a global basis and that's a global comment and not just referring to Japan.

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John Kim, CLSA - Analyst [25]

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Can you remind us also with that debated element. Is that going to be funded on balance sheet or is that going to be a joint venture with your Fund or within the Fund itself?

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Gregory Goodman, Goodman Group - CEO [26]

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Osaka is the first -- should be the first development with a couple of others for our new partnership in Japan.

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John Kim, CLSA - Analyst [27]

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Okay. Just a quick question on the impairment in Europe. It looks like some of the assumptions you had made for the impairment testing -- a lot of assumptions actually seem a bit more favourable, so I'm just wondering why that there was impairment during the period and if it's related to the rights issue that you had?

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Gregory Goodman, Goodman Group - CEO [28]

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Primarily just climbing in the UK; you know, it's been a pretty hard market and primarily it's around timing of development. So it's all at the margins and quite frankly it is part of our global network. The UK is actually very, very important with customer relationships and we're driving some of those relationships back into other European markets. So it doesn't tell the full story, but it's still on the page that we've got confidence in that business in the long term.

In terms of - the intangibles are carried separately between the UK and Europe, continental Europe. The continental European intangibles and the value news calculation is looking very, very healthy and strong on the back of very, very strong -- better even than our expectations -- sort of levels of activity and profitability through the continental European business.

So that's where that difference is UK versus Europe.

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John Kim, CLSA - Analyst [29]

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And does this affect your guidance at all?

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Gregory Goodman, Goodman Group - CEO [30]

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No.

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John Kim, CLSA - Analyst [31]

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Can you explain again why you increased your guidance? I know business has done pretty well, but is it timing of projects, is it increased margins? Anything specific that we could get --

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Gregory Goodman, Goodman Group - CEO [32]

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No we're very happy and I think the market's very happy with 6.1%. I think we will gallop into this half as well. I think it will be a very strong half and let's look at the metrics in June as we get closer to it. But it'll be a strong result around all operating businesses and that's the way we want it.

It's set us up very well for financial year 13 because we're very conscious the world is a mix of different markets that are actually now starting to move in different cycles. So we're going to be very fleet of foot in regard to obviously taking the opportunities in the markets where those opportunities are.

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John Kim, CLSA - Analyst [33]

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Great, thank you.

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Operator [34]

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Your next question comes from Stephen Rich from Credit Suisse. Your line's open, please go ahead.

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Stephen Rich, Credit Suisse - Analyst [35]

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Hi guys just a few questions but I can't resist the opportunity going on from those last comments Greg, to ask if there's anything you'd be willing to say publicly about any aspirations for Brazil?

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Gregory Goodman, Goodman Group - CEO [36]

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Oh look we like the market. We've been there; we're doing an extensive study on it. Danny Peeters our European head is the gentleman who has got charge of it because he can get there in nine hours and it takes me 22. But effectively we've got some very big capital partners that like it -- that some of them are already in that market in different investment grades. The market personally I like for the long term and we've got some large customers that would like our brand there.

So look quietly we'll move through our process of evaluations we're doing, but it's fair to say we've got the customers and capital would like to go there, so the ingredients are there providing we have the right people on the ground.

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Stephen Rich, Credit Suisse - Analyst [37]

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Okay. Just moving back to the domestic front, I notice on the JLL numbers you saw a strong kick up in pre-lease demand in 2010 but then just tempered in 2011. As you talk about the world recovering -- different economies at different speeds, is there a risk do you think at some of the expansion for example in Europe or Australia just coming off a little bit as a bit of that pent up demand has already been released now?

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Gregory Goodman, Goodman Group - CEO [38]

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Look I think with Australia we're doing a lot around regeneration side, we're doing a lot around expansions. We've got a lot of work around South Sydney at the moment where we seem to have competition for customers for buildings. So I think you'll find that there'll be an evolution around some of our markets where double-storey rousing will start to become a reality. You will see some of our venues, residential conversion sites coming through as well.

So Australia's going to be a mix of opportunities, but we've got a very strong business here and very confident in regards to how that's going to track I think in two or three years and it's still a very stable market and at the top end being the major customers we're dealing with, they're actually doing pretty well. They're absorbing some of the smaller customers that then require consolidations and Europe, you know, there's one very, very large market of 400 million people including the UK. Things are going on; there's a number of pre-commit -- we've got on the page at the moment and the things that Goodman has are the competitive advantages we have very, very good infrastructure of people. They're now very proven. The brand is a brand considered over there that can deliver.

So we have the capital and I think you'll find our market share is very solid and very large over there and that's probably going to continue even in a market where the total meterage is down -- we have a bigger slice of it.

So we're very comfortable we'll continue to do relatively well in that market.

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Stephen Rich, Credit Suisse - Analyst [39]

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Great. Just the last question -- any update on Langfang in China?

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Gregory Goodman, Goodman Group - CEO [40]

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Yes Langfang we've got - we're very advanced with the Langfang Government. We've got a site there now which we have the benefit of being able to draw down and we're about to draw down about 33 hectares for some customers and that's going very well.

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Stephen Rich, Credit Suisse - Analyst [41]

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Great, thanks Greg.

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Operator [42]

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Your next question comes from Simon Garing from Merrill Lynch. Your line's open, please go ahead.

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Simon Garing, Merrill Lynch - Analyst [43]

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Good morning gentlemen. With the previously discussed Malaysian purchaser for AUD1 billion in Japan assets, I'm just wondering where that purchase was at?

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Gregory Goodman, Goodman Group - CEO [44]

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Oh look I don't think we've discussed it. It's all I think the good journalists at The Australian was probably discussing it. So from our point of view I'll go back to what I said before. We've got four large capital partners talking to us about various opportunities in various markets around the world Simon, so some of these things do leak out into the market, but from our point of view we cannot confirm or deny.

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Simon Garing, Merrill Lynch - Analyst [45]

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Yes, so I probably going back to the previous IPO in Malaysia that you were going to work with them as the property manager which I think you've discussed.

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Gregory Goodman, Goodman Group - CEO [46]

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-- that IPO clearly didn't occur and the private equity market would be a far more simpler way to go.

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Simon Garing, Merrill Lynch - Analyst [47]

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Got it, but there was still an intent by Goodman to sell those assets and not getting a funds management -- see I'm just --

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Gregory Goodman, Goodman Group - CEO [48]

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I don't know whether we had an intention to sell assts. I think secondary assets in Australia we find are very, very - the cap rates are still pretty soft. We don't have a major sale program going in Australia, but all said and done that major sovereign world funds around the world we would look at partnering in Australia, yes we will do that. If we find the right partner there is no doubt we'll look at that.

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Simon Garing, Merrill Lynch - Analyst [49]

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Okay terrific and with Japan, just to follow up, you're growing that business while you still own less than 50% of the business. Is that something that can get resolved shortly?

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Gregory Goodman, Goodman Group - CEO [50]

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Well there's some other derivatives in that business that effectively I suspect will be exercised in September which takes the combined holdings of something like 85% on a fully colluded basis. That's our joint venture in Japan and you'd expect that to occur.

I can't really make any other comment on the ownership structure in Japan around the operating business.

Goodman is though partnering the development business directly with its direct balance sheet capital at this point in time. So I expect the development fund will be Goodman partnering directly with the business in Japan providing the services.

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Simon Garing, Merrill Lynch - Analyst [51]

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Okay that makes more sense.

With GAIF I noticed that in January you were hit with your liquidity facility. I'm just wondering what's going on with GAIF because your stake continues to stay well above the targeted 20% level?

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Gregory Goodman, Goodman Group - CEO [52]

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Look I think in Australia it's a very, very high quality fund; the best quality fund in industrial in Australia by a long shot.

We're actually pretty happy with our holding around current pricing in the 40s. Our belief around Australia is in a -- my prediction that we should be in a falling interest rate market here. I don't think the Reserve Bank necessarily agrees with me.

But I think what we're seeing, you know, interest rates will be coming back. The demand for high quality assets in Australia -- bearing in mind a safe economy -- is good. So we're very happy to leave it at this sort of level where the current pricing is and I think we're getting close to 8% cash returns off that fund. It's got some great development coming through. So that's a pretty cornerstone stake for us and we're pretty relaxed where we're sitting at the moment.

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Simon Garing, Merrill Lynch - Analyst [53]

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Okay and two questions for Nick if I can just on that -- you're getting an 8% cash return. What's your marginal draw down cost here in Australia for that type of Aussie investment?

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Nick Vrondas, Goodman Group - CFO [54]

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At the moment we're around sort of 8%, relatively neutral on the marginal cost sets.

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Simon Garing, Merrill Lynch - Analyst [55]

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Okay and the overall group rate is what closer to 4?

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Nick Vrondas, Goodman Group - CFO [56]

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Yes correct.

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Simon Garing, Merrill Lynch - Analyst [57]

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Okay and final question is -- do you normally have a second half skew in your development earnings at the first half? I'm just wondering if in your guidance you don't have that same skew given that you're only looking for second half EPS to be the same as the first half EPS?

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Gregory Goodman, Goodman Group - CEO [58]

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Correct, that's right.

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Simon Garing, Merrill Lynch - Analyst [59]

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Okay, thank you.

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Operator [60]

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Your next question comes from Paul Checchin from Macquarie. Your line's open, please go ahead.

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Paul Checchin, Macquarie - Analyst [61]

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Hi guys can you hear me this time? Excellent, thank you. Just a couple of quick questions; one just in relation to Europe. Obviously from a macro perspective it certainly seems to be in a bit of a mess, yet every six months you guys keep putting up a slide like slide 15 where you've got development after development that you're winning and obviously going on to develop. I'm just wondering can you give any insight into what some of these tenants are actually thinking. So some of them like Amazon may be growth space, but in terms of the outlook, what are the tenants actually doing? I mean are they consolidating; are they simply growing; do they just want newer sheds? What is it that's actually driving them to pre-commit these developments?

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Gregory Goodman, Goodman Group - CEO [62]

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Yes well I think when people talk about Europe they talk about it very liberally and they seem to talk about the situation in Greece. You'd know that Germany has been doing very well; Poland's doing very well. The UK -- very pleased to hear the other day from our team over there it's not going into the double-dip so they were all very excited about that.

But customers are actually doing things. Some of our largest customers in the world have got a lot of cash. They are actually buying smaller competitors who are struggling. They're competing very, very heavily to win market share right at the moment, so their margins may be down, but they're trying to win market share during this part of the cycle.

We then have the connectivity and the ability to talk to our Japanese customers about their European aspirations. We have the Chinese customers that are also looking at Europe and vice versa.

So the global network is really starting to work around the customer business, so it's fair to say that is adding to our market share of a five million square meter market at the moment.

We're winning probably 20 odd% of that market, but it is still a five million square meter market and 400 million people that are still consuming, they're driving motor cars.

The e-commerce sector I think quite frankly is being underestimated in regard to the impact it's going to have on industrial and the amount of industrial sheds that are acquired.

Just, for example, in China we've probably got 10 to 12 buildings we know e-commerce will be wanting over the next 18 months and these buildings seem to be 50,000 to 100,000 metres.

Europe there's another four or five buildings from the e-commerce sector that are required over the next 12 to 18 months and Goodman's well-placed to do those. The brand is well recognised. We have a top line infrastructure and people. If you don't have the people you can't do the business and effectively we have the capital, as you would have seen because we've been a big raiser of capital through our GELF fund. We actually have two or three large investors that would want to get in that fund right now and that fund is turning out close to 8% cash yield in a very, you know, (inaudible) great regime.

So put into context five million square metres, 400 million people and that sort of puts Europe in context.

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Paul Checchin, Macquarie - Analyst [63]

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Yes and I guess just looking at your slide 42, I mean there's been a reasonably significant increase in the amount of development you're doing on balance sheets in Europe. Is there any reason why it's on balance sheet? Are you going to see that proportion --

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Gregory Goodman, Goodman Group - CEO [64]

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-- it's all coming mate, that's all flowing through to GELF and our CBRE funds that'll be a timing issue I would have thought.

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Paul Checchin, Macquarie - Analyst [65]

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Okay.

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Gregory Goodman, Goodman Group - CEO [66]

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It's all flowing through and the fund has full visibility for development pipeline and we're having regular updates with investors and the Investment Committee has funds. So we know what their appetite is and we have some other accounts in Europe also which quite frankly we cannot cater for at the moment around their desire to have A grade industrial product and therefore we've reduced it.

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Paul Checchin, Macquarie - Analyst [67]

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Okay and just secondly, I mean you're now talking about kind of development starts of AUD2.5 billion up from the previous AUD2 billion. Presumably number one, you're confident in your ability to continue to secure land in China and secondly, are you kind of getting to that AUD2.5 billion by assuming expansion into a new market that you're not currently in?

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Gregory Goodman, Goodman Group - CEO [68]

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Oh look I think the new market makes it pretty easy. The sort of markets we're looking at, including the biggest market in the world, if we get a reasonable start there with the right capital partner, we've already got the customer base that would like to see our brands in a market like that, put the right team on the ground and an organic start would be very sensible for us.

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Paul Checchin, Macquarie - Analyst [69]

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Yes okay, thank you very much.

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Operator [70]

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There are no further questions at this time. Mr Goodman, please continue.

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Gregory Goodman, Goodman Group - CEO [71]

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Yes thank you very much. We'll shut it down and thank you for your attendance.