Good day and thank you for standing by. Welcome to the Goodman Group half-year 2024 results call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Greg Goodman, CEO. Please go ahead.
Hello. With operating profit of over AUD 1.1 billion for the first half of FY 2024, up 29% on the same time last year. We're also upgrading earnings per security growth to 11% for FY 2024, which delivers an operating profit of approximately AUD 2 billion. Customers are demanding greater efficiency and productivity from their operations. Whether they're warehouse customers implementing AI, increased mechanization, or automation of their warehouses, or hyperscalers and colocators looking for the right data center to suit their requirements in the quickest time possible, it all comes down to location, intensity of use, and increased productivity. We're meeting this demand by executing on our strategy, adding value for customers by delivering essential infrastructure they need with a combination of data centers and industrial property. This is also reflected in our AUD 12.9 billion of work in progress, of which 37% is data center development.
We've continued to advance our data center strategy in FY 2024. We're leveraging our competitive advantage by securing power, planning, and commencing infrastructure works. We continue to work with our customers on the best Powered Shell and turnkey solutions to suit their requirements in terms of capacity and timing on key sites around the globe. Goodman's global expertise and track record in delivering large-scale projects for customers, coupled with our strong balance sheet, is resulting in our increased development of high-value, high-tiered data centers in supply-constrained locations. Our global power bank has expanded to 4 GW across 12 major global cities. Secured power has increased to 2.1 GW and a further 1.9 GW of power in advanced stages of procurement. We're currently reviewing additional sites we own for potential data center use and have activated a number of data center projects around the world this half. Excuse me.
We've marked the books across our global portfolio, resulting in a global average cap rate of 5.1%. We believe this is appropriate for our portfolio in the current global economy. The fundamental strength of our locations and active asset management approach is achieving solid rental growth and also high occupancy. As an active manager, we're constantly reviewing our capital allocation and assets to provide the best risk-adjusted returns. The cost of capital has changed globally, so the active management of our assets and capital will be key to support sustained earnings growth over the long- term. As part of this, we're reviewing all our sites around the world for intensity of use and high-value outcomes. I'll now hand over to Nick to go through some of the results in detail.
Thank you, Greg. Let's turn to slide 10 to look at the income statement. We'll first cover the items that relate to our cash-backed measure of earnings, which we call operating profit, and then discuss the items at the bottom of the table. Operating profit excludes the unrealized fair market value adjustments on properties, mark-to-market movements on hedges, and the accounting fair value estimate relating to our employee long-term incentive plan. Overall, FX movements had a AUD 23 million positive impact on the translation of our foreign-denominated operating result for interest when compared to the prior corresponding period. This benefit was offset with a commensurate expense in our borrowing costs. This comes about as a result of movements in the realized costs on our debt and derivatives. That's how our hedging strategy is designed.
Looking at the movement in investment earnings now, direct property net rental income is lower than the same time last year. This was due to AUD 1 billion of net divestments over the past 18 months. That's excluding any non-cash items. Over the last six months in particular, we had a net reduction of AUD 0.4 billion. We expect to see a further reduction in direct property rental income in the second half owing to the full period effect of the sales. The bulk of our investment income comes through our co-investments in the partnerships. Compared to the same period last year, cornerstone investment income increased by AUD 26 million. Rental growth accounted for AUD 13 million of the increase, which is the result of the like-for-like NPI comparative. This has been supported by our high occupancy rate of 98.4% and the ongoing reversion to market rents.
Net investment contributed AUD 8 million to the growth, and the remaining AUD 5 million came from the FX translation. Over the past 18 months, we have invested a net AUD 1.4 billion into the partnerships globally, AUD 0.6 billion of which occurred in the past six months. Over time, we want to grow this part of the business as we continue to expand our portfolio of assets under management and our investment in it.
Greg also mentioned a specific drive to enhance the returns from the portfolios, too. We expect growth in rental levels to continue given the strength of our portfolio and the reversionary potential of some 25%. Management revenue was up AUD 96 million over the first half of FY 2023 to be AUD 361 million. This included a AUD 6 million FX benefit. Stabilized third-party assets under management is AUD 68 billion. That's around the same level it was last December.
Valuation declines were offset by net acquisitions and the completion of developments. Performance and transactional revenues contributed AUD 136 million this half compared to AUD 42 million this time last year. We're expecting more performance and transactional revenue to be recognized in the second half, which will see the full-year result increase materially from FY 2023. This increase is the result of changes in timing-related issues that impacted FY 2023 that we discussed in August. Total fee revenue for the half as a percentage of average stabilized third-party assets under management was 1.1% annualized. We remain comfortable with our long-term guidance of over 0.9% on average. Our realised development earnings for the half were AUD 805 million, which is up by AUD 202 million compared to the prior corresponding period. This included AUD 17 million of FX-related benefits.
Margins have held up well, and the projects realized that were originated on the group's balance sheet was also high. You'll recall that we had a significant volume of completions in FY 2023. Subsequently, there were a number of crystallized sales in the current half. These included those that gave rise to the AUD 271.5 million of operating profits that were from the reversal of prior period revaluation gains. Just as a reminder, over the past few reporting periods, we've flagged the development gains on sales of assets that have been subject to fair value movements between commencement and sale. We do not reflect these gains in operating profit until the transactions complete. So that these profits aren't double-counted over time, we notionally offset them against the current period valuation results when we do our reconciliations. Development remains an important part of our business strategy, and our workbook remains strong.
Our work in progress dipped over the past year as we paused on project commencements to consider the alternatives such as multi-level logistics and data centers. In the December quarter, we began to commercialize a few of the data center sites, which has resulted in an increase in WIP when compared to the September quarter. We want to point out that the data center projects will, on average, be in WIP longer than the logistics properties. The pause we took also means that there will be a resynchronization that will result in a lower volume of completions short-term while we ramp up again. Given the increased project duration, we also expect higher-than-average margins to compensate. You'll see this in the growth in the yield on cost.
At the same time, we're also originating a significant volume of work on the group's balance sheet, so we'll have the opportunity to crystallize a greater portion of the gains in operating profit. This approach will be managed in conjunction with our partners, who are themselves considering their own investment approach. This should culminate in an optimization of capital allocation and ROA on Development to achieve an acceptable risk-adjusted return while maintaining our focus on EPS targets. We remain enthusiastic about the prospects for Development demand from both our logistics and data center perspective, which bodes well for future revenue and growth in AUM. The increase in our underlying operating expenses has been moderate. Due to the strong operating results in the year to date, there has, however, been a timing difference associated with STI accruals when comparing this period to the prior corresponding period, which explains the overall increase.
We expect our full-year operating expenses to be a little over AUD 400 million, and we encourage you to analyze this on a full-year basis to smooth out those timing issues. Our net borrowing costs were up AUD 17 million compared to the first half of FY 2023. This was mainly the result of the AUD 23 million FX-related borrowing expense, which offset the earnings translation benefit discussed earlier.
At the same time, we've had an increase in the net interest earned on cash and derivatives. Our cost of borrowings on our loans is currently 3.4%, but taking into account our interest rate and currency hedges, the net WACD is less than 1%. As far as the non-operating items are concerned, we had AUD 1 billion of unrealized valuation adjustments in the half, which resulted from the group share of the AUD 3.4 billion across the entire portfolio of assets under management.
This equated to a decline of around 4%. From that, we deducted the AUD 271.5 million of now realized prior period gains to get to a AUD 1.24 billion net result for the half. cap rates expanded 60 basis points over the period, which, all other things equal, would have resulted in a decline in values of 11%. However, growth in rents and the contribution from Development dampened the impact of rising cap rates.
It's worth noting that our global weighted average cap rate was last at 5.1% in June 2019, and that the cumulative revaluation gains for the total portfolio since that time are AUD 14.6 billion. Another customary area of difference between operating and statutory profit is the fair value movements of hedges, which were up by AUD 70 million overall. This was mainly due to the movement in the Australian dollar between the June and December balance states.
Mark-to-market derivative gains or losses are reflected in the statutory income statement because the group does not apply hedge accounting. These movements should be considered in the context of the AUD 120 million loss reflected directly in equity through the foreign currency translation reserve. As usual, we also exclude the accounting cost of the employee LTIP, but we include the tested units in the denominator when calculating our operating EPS. That's when they actually have an impact on security holders. The accounting cost of the LTIP has increased mainly due to the valuation inputs and the increasing security price. A few remarks now regarding the balance sheet on slide 11. Due to the sales over the half, the wholly owned stabilised asset portfolio has decreased by AUD 0.4 billion since June 30th, 2023.
Our share of the stabilized assets within our cornerstone investments in partnerships were down by AUD 0.8 billion over the half. New Investments and Development completions were offset by the valuation declines. Compared to June 2023, our Development holdings are up by AUD 0.3 billion, with the additions, expenditures, and transfers for redevelopment offsetting completions and sales. As you can see from the balance sheet movements and cash flow statement, the increase in working capital allocation of the group's balance sheet inventory is the most significant reason for the change. This is consistent with the higher capital intensity of the new projects as well as the higher proportion originated on the balance sheet. Our current WIP is around 80% pre-sold, which gives us a degree of certainty about cash flow and earnings. Overall, we've generated AUD 1 billion or over AUD 1 billion of cash through operations this half.
AUD 338 million of this is reported through the operating cash flow statement. However, the statutory cash flow includes outflows associated with the investment in Development inventory of around AUD 200 million during the half. There was also nearly AUD 300 million of earnings arising from sales of development properties, which are included in the investing cash flow for statutory accounting purposes. So the combined effect of these Development activities explains AUD 500 million of the difference between operating cash flow and operating profit. Also, there's always a difference between the timing of distributions and income received from the partnerships. This was nearly AUD 40 million this half. And the timing of cash receipts for performance fees and incentive payments collectively accounted for around AUD 250 million of differences between operating cash flow and operating profit.
The cash generated from our retained earnings funds the vast majority of the investments we make, which is consistent with the design of our long-term capital management plans and the distribution policy. That's a good point to turn to slide 12. As we said before, we'll operate our gearing within a range of 0%-25% with the level to be set with reference to the mix of earnings and activity levels. So in light of the activity and developments, we aim to maintain financial leverage in the lower half of the band in the near- term. In addition, we continue to invest our retained earnings back into the business to generate strong returns and fund its growth sustainably. All in all, we have significant financial capacity to help manage the current market risks and to capitalize on suitable opportunities that may arise. That's all from me. Thanks, Greg.
Thanks, Nick. And now we go to the end and the outlook. Goodman is positioned well for FY 2024. We're evolving as a provider of essential infrastructure in key cities around the world. We're delivering the critical warehouses and data centers needed to power the digital economy. We're using our competitive advantage to achieve results. So in concluding, we've upgraded our growth guidance to 11% for the year, which delivers approximately AUD 2 billion of operating profit and sets us up well for the future. I thank you, and Nick and I are happy to take questions.
As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Simon Chan with Morgan Stanley. Your line is open.
Hi, guys. Good morning, Greg. Good morning, Nick. Thanks for the presentation. Your guidance of 11%, I was just doing some back-of-the-envelope here, implies an earnings split of 57, 43 first half, second half. Or the other way to look at it, it looks like second half will be smaller than the first half by AUD 250 million-AUD 260 million. Just wondering if you could just walk us through why there's such a big delta between first half and second half and some of the key moving parts.
Yeah. Look, I don't know we'll walk you through that necessarily, but I think what I will leave you with a comment: we are in a very uncertain world. We are concerned about capital flows globally and the geopolitical risks. And it's fair to say we're taking a pragmatic view - I won't say a conservative view because I don't think that's right - we're taking a pragmatic view. We've had a very good first half, so I think why don't you bank that? And the second half, I think we put a pretty responsible number on the page in the world we work in. I think the other thing to be aware of, that interest rates are not coming down as quickly as people would like.
And I think you'll find there's a bit of a buyer's strike from big pension funds around the world as well in regard to buying assets until they understand the pricing. So it's more those elements we're building in to make sure that we're robust and boilerplate. We don't want to disappoint, and we don't want to overpromise. Nick, I don't know whether you've got anything to follow on from that, but.
No. No. Greg, is your pragmatic view in relation to your AUM or cap rates or Development margins?
Everything. There may be transactions. For example, you better to do in the second half of the financial year because you might have a 50 basis point advantage. You would have seen where cap rates have gone in the U.S., so they've been booked at 5.8%. That's a buy for us at 5.8% with good growth in the U.S. We can get very, very good returns there. Actually, we've just bought a site in Jersey City - I think we exchanged on it yesterday - which will be a very, very good simple development in that area. So we're using the opportunity to position ourselves well for buying, but we don't want to be obviously transacting necessarily in that same market. So we're just being a bit pragmatic, careful. We think 11 is a really good number.
It's AUD 2 billion or thereabouts operating profit, and it backs up well on a first half. And as you know, Simon, when we get to the result in August, it really is then about what are we setting our sail for for 2025? And I think we're also very conscious that we want to make sure that we've got a good performance in 2025.
Yeah. I think that's the point, probably, Greg, that the inference from Simon's question is that we've peaked and it's downhill from here. I wouldn't necessarily say that that is the inference that you should draw from that.
Great. Thanks. Hey, your yield on commencements, 6.9%, that seems very good, a big improvement on last year and probably one of the best ones I've seen for a number of years. Should we expect that sort of number as a permanent feature now that you've got more DCs in there and therefore it'll be higher than the usual 6%-6.5%? Or is this just, I guess, pure luck, etc.? Can you give us some thoughts on that?
Simon, you make your own luck, mate. You know that. So I don't think luck comes into it. What we're doing on industrial front, we're targeting over 7 on industrial. Forgetting about data centers for the moment, that's higher. And effectively, I'll point to the block of land we bought in Jersey City. The feasibilities on that are over 7, and it won't get through the gate unless it has a 7 in front of it. Unless it's in Tokyo, that might be 6.5. So we're in business to make money for our shareholders. We're not in business to earn fees of 4% or 5%. We don't do development on that basis. And we've avoided being a commodity developer, and we're avoiding being a commodity data center operator.
I was in the U.S. a couple of weeks ago, and there's plenty of data center developers in the U.S., and there's probably 100 of them now because they've all flipped out of being industrial developers to be data center developers. But a lot of the business over there's been done on fee for service and 5%-6% and let's go and buy land where land is $1. Same rules apply to industrial, to data centers. We're not a commodity developer. Don't want to be one. We'll do it if it makes money. If it doesn't make money, why bother? And I'd much rather have the conversation with our shareholders about why we're not doing something because there's no money in it rather than why we're doing something when there is no money in it.
So I think we're super focused on a world where cap rates are still moving. Hopefully, they've stabilized, but that's a hope, not an actual event at this point in time. Inflation is still moving around the world as well. So we need to be in the 7s, data centers north of that, to make it worthwhile us doing it.
That's clear. Thanks very much, guys. That's all I've got this morning. Thanks.
Our next question comes from the line of Sholto Maconochie with Jefferies. Your line is open.
Hi, Greg and the team. Thanks for your time. Good result. Just finding some questions, so a line of questioning. On the performance fees, I think you guided to 150 previously. Booked 136 this period. What are you sort of guiding to in the guidance for the full year performance fees now?
Sholto, we're saying that there's more, but we're not giving a specific guide as to how much more because that will depend on, obviously, the events that are scheduled for the current half. But also, when we get to June, we have to take a view on future events as well. And so we'll take that assessment at that point in time. So there will be more. I'm pretty confident that there will be more. Just how much more we'll update you on as we go through the year.
Yeah, that makes sense. And then on the WIP, I think your quarterly update, your data centers are 25% of WIP, now they're 37%. And I think you were saying over the near- term go to 50%. When do you expect that sort of to hit that sort of target? I know it's always moving around, but when do you expect data centers to be 50% of the WIP?
Look, I can think you can expect there's going to be some pretty significant data center starts running into the second half of this year to the beginning of calendar year 2025. That'll be Europe and actually potentially the U.S. That's coming on really, really quickly and really, really well. And we've just kicked one off in Hong Kong as well, actually, where we've got a shell and we're pulling every second floor out of the building, and that's a redevelopment from an industrial into a data center. And that's about, I think, AUD 800 million of completion value. So look, yeah, we're on our way, right? So I think it'll be 50% probably as we go into the next calendar year comfortably.
I suspect you'll see margins robust, and I think you'll see the yield on cost being very acceptable in regard to the risk and the timeframes we're talking about.
Then on the balance sheet, I think should we still expect that increased balance sheet contribution as well and then these to be spun into new data center funds like the Japan one? Is that how to think about it going forward?
Yeah. There's a lot of origination. I think Nick touched on it before going on our balance sheet, and I think that's just part of the plan and the strategy. We need to do that, though, with a balance sheet that's strong, which it is, where we've got plenty of liquidity, which it does have. So yeah, you'd see us originate. You'll see us potentially even start building Powered Shells, say, for data centers. You could see a movement along the track as we're a year into it because some of these projects will be two, three years in the making. We're also looking at customers' turnkeys. So we are looking at primarily the best model to build the best building in the best timeframe because time in this business at the moment around data centers is optimizing that means value for Goodman, but also value for the customer.
Time is critical. So I think from that point of view, you'll see us doing turnkeys, a mix of turnkeys, Powered Shells, land sales, which I think when you look at 4 gig on a blended rate, that's probably between $50 billion-$60 billion of total project value, not cost, but value effectively. So I think you'll start to see that wind through the numbers as we get into calendar year 2025.
And then finally, on the WIP, obviously, it moves around a bit quarter-on-quarter. But if we just assume production around that, you're AUD 7 billion, but you've got higher margin because of mix and also higher margin on balance sheet. So development will keep growing even though production's sort of stable just on the funding mix and the project mix?
Yeah. I think the margins we're talking about in our business, production is probably going to become less reliable, and Nick might say something about that because some of the origination, the margins, do we do land sales on some of the stuff as well, not just data centers? We're actually doing very well on industrial as well and positioning ourselves around that. We've got a really good site coming out of the ground in L.A. at the moment around the port, L.A. Port. And I think we're in the 8.5%-9% cash on cost on that, even taking a conservative rent. So there's going to be more margin, I think, is the way to look at it. And don't get scared by the lure of numbers, big numbers, because big numbers sometimes don't add to profit, and I think you guys know that.
So Nick, do you have anything to add about the production?
Yeah. Look, I think yeah. I mean, the focus for us is generating return on assets, appropriate margins, and getting EPS growth. If we can achieve that with less production, but it makes sense to do it that way, then that's what we'll do. I think for the purpose of mathematical modeling, something like what you described is a good starting point. But I think what Greg's trying to say is that we're not, it's not painting by numbers here. We're not worried about sort of that statistic. What we're worried about is returns to shareholders.
Right. Sounds like a very pragmatic guidance there. Thanks very much.
Our next question comes from the line of Lou Pirenc with Jarden. Your line is open.
Yeah. Thank you. Good morning, Greg and Nick. A quick one kind of on your earnings composition. I think, Nick, you mentioned that you wanted to grow investments more going forward. But do you or the board have a kind of a view where over the next few years you want that mix between Investments Management and Development should really be?
Look, I think Development's kicking around 50% of the number at the moment. As we keep what we produce, you'll find that number will increase. And what we're keeping is, like I've said, 7%, 8%, 9% or higher cash on cost. So that starts to boost the investment side of our equation pretty markedly as we go along as a proportion of earnings. And at the same time, organically, if you start to build out data centers and industrial over the next five years, you'll see the assets under management grow very strongly. I just caution that, though, as well. We are absolutely going to sweat the assets around the world. And so I think we saw during the pandemic, a lot of people got very lazy on returns because at the end of the day, the cost of capital wasn't an issue. Debt wasn't an issue.
Now they are. So I think we, as a group, see actually opportunity as well now by us starting to come back to the market to actually turn over capital in the higher and better uses and more intensification. So I just caution that in regard to the growth in assets under management. You need to look at that more over five years. I think over the next 12-18 months, we'll be still very busy rotating assets, we believe, into higher earning assets for the long- term, which is then going to relate to a pretty high development number, I think, for the next couple of years. But we'll grow into it, Lou. And yeah, the board is very conscious of growing into it.
Yeah. Sorry, just to make sure that I understand it, so you're talking about asset sales. Can you quantify kind of what percentage of AUM or your balance sheet you think could be churned into a better opportunity?
No. No. It's totally opportunistic. We're seeing people come into the market at the moment. We're seeing it in Australia, actually, as well. We want assets that can grow at 4%-7% a year, right, to suit the global profile. They don't have those sort of growth rates. They have a five in front of them or a 4.5. Yeah, we'll probably be out.
Lou, so this is why we're not trying to be evasive. I think we're trying to be pragmatic and give you an insight into kind of what we're thinking. And that's the problem with having hard AUM targets and KPIs and hard sort of pie chart targets. You end up doing things that probably aren't commercially the right thing to do. And so what Greg's trying to say is that, yes, long- term, there is a plan and there's a roadmap to seeing more contribution from investment, but we're not going to let that get in the way of making decisions in the short- term that are the right thing to do for the assets and the portfolio and improve the overall return.
Yeah. No, that makes sense. And then I guess I'm going to get a fairly similar answer. But in terms of 12 months ago, you flagged that you wanted to do more developments on balance sheet was going to help your margins. Are we kind of largely done with that percentage-wise, or do you think that we should expect you to take more development risk on your own balance sheet versus doing things in the funds?
Yeah. Look, I don't think we're going to be a lot of the, for example, data center sites, those sites are already where they are effectively in regard to balance sheet or partnerships. And then depending on what percentage of the partnerships we own. So I think that's already set. The site we just bought in New Jersey is on our own balance sheet. For example, there's probably two or three others where we're in negotiation around the world, which are really big parks over time, and will be a combination of actually data centers and logistics combined will probably be balance sheeted, but their drawdown basis of capital over years, not months. So I think you'll find, Lou, we'll manage the risk carefully. Once again, very, very pragmatically. There's plenty of big partners that want to do things with us around the world, which is great.
Even today, where capital is subdued, we have big partners that want to do things with us. And we are looking at simplifying our fund management structures around the world where our big partners now are going, "Guys, yeah, we like development. That's been great. But if you can get me an 8% or 9% total return on an asset unlevered because we just buy it well in LA, why don't I buy that?" And we're going, "You should buy that." So I think you'll find that the way the capital flows are going around the world is what was really cool, doing a lot of development for a lot of our big partners is actually, "What, guys, if you can get us an 8% or 9%, wow, that's pretty good.
We don't have to take the risk." So I think you're going to find that part of our business and why we're not too concerned about the growth in the AUM, there's a lot of capital channeling to core investment, two things they want to buy globally and two things only, industrial and data centers. They're the two hot topics around the world.
And can I add, Greg, just the corollary of that, Lou, is that when you look at the overall capital allocation to development, you might not see that in the partnerships growing. And so fortunately, both to the assets and management and our total balance sheet, the fortunately consolidated exposure might not move as materially as the direct ownership. And that's part of the risk mitigation. And that's what I meant when I said, "We'll manage this in conjunction with our capital partners.
That was great. Thank you.
Our next question comes from the line of Grant McCasker with UBS. Your line is open.
Good morning, Greg and Nick. Are you able to just elaborate sort of on how the discussions have evolved with your major counterparties in the data center space? I guess it's the hyperscalers and also capital over the last six-12 months. And this is sort of considering that operating risk, construction costs, are Development margins getting better? Can you just sort of just elaborate, just give a little bit more information there, please?
Yeah. Good question, Grant. Look, it's fair to say the hyperscalers around the world want a full program and complete product as quickly as they can get it. And you know well, and I think you've done a lot of good work on it actually in regard to the demand. The demand is unsupplyable at the moment, so there's not enough supply. And the locations where we are powered and planning and building, talk Frankfurt, talk Paris, talk London, talk Japan, Tier 1 markets, which are not supplyable at the moment. But what everyone is after and what we're after with our customers is a better build process.
We don't want to end up with a scenario where we build a third of a building, let's say, a third of a building's the Powered Shell, and then have a clunky timely type of fit after Powered Shell, different contractors and different processes and what have you. So I think the game very definitely is build a better product in a better timeframe at a better cost, right? Now, who owns what? Let's just park that for the moment because Goodman will own what's financially expedient for us to own. And we don't have to own all of it, right? Because if we did, 4 gig builds out to $80 billion, right? That's the bill if you do turnkey on the whole portfolio. So I don't think that's what we're doing.
That's why we talk about $50 billion, which is somewhere in between where I think some of it you'll do a full build. Some of it you'll do in partnership with hyperscalers and potentially colocators where they'll actually put in some of the improvements. And they've already got generators and other equipment they've already got on order. So that'll work. I think what ultimately occurs is Goodman has to look at risk-reward. And we then look at the capital we're putting in and how do we get our returns, which will then be our gauge. The other thing that to be very careful about in the sector, and we certainly are, there's certain parts of the assets that will need to be depreciated. And you need cash flow to depreciate them. And then you need a return on that cash flow that's out, right? So sometimes that's ignored.
That is not ignored by us in regard to the way we're going to structure this, right? So if we're amortizing specialized improvements over 10 years, we need an amortization rate that goes to zero. And we need to get a return, right? So that is the way we're looking at it. I don't think that anyone sees Goodman's competitive advantages being an operator. Our competitive advantage is land, power, and program. And that competitive advantage for us is where the money is. So that is the way we're applying it. I've spent a fair bit of time in the last six-nine months with GCs, customers, our teams about our approach. And that's where we seem to be. We see the sweet spot. But we haven't allocated the capital at the moment to the specialized improvements in the shell.
What we're saying, we think it'll be about AUD 50 billion over a period of time, say five years, for the 4 gig program. That might run out to seven years. And that 4 gig we're adding to that, you'll find some a roll-off, then some more a roll-on. So I think that'll be a power bank, which is formidable globally and, in my view, very, very valuable and not to be underestimated in regard to demand right at the moment. Nick, have you got anything else?
Can you elaborate?
I'm sorry. What was that, mate?
So then, yeah, just following on then, that 4 gig power bank has ticked up slightly. Can you discuss sort of the size of potential opportunities you're evaluating at this point within the existing portfolio?
Do you mean above 4 gig? Oh, well, here we go. You put another gig on it at the moment, right? So that's why over the next couple of years and some of this rolls off, our view, providing demand is maintained and AI and everyone's using digital processing the way we think they are going to be using it. Effectively, some are rolled off and some are rolled on. So I think that 4 gig could be a pretty constant number over the next few years, even though some is put in production as well. So look, it's a formidable power bank. I think the problems we see in the industry at the moment is the funding of some of these programs around the world. And even in the U.S., where you might have the merchant developers now jumping into the game, they need pre-commits.
They need fundamentally financing before they start them. They're probably building in Virginia where we wouldn't go. Funding of some of these things is not going to be easy. So when you're talking to the big hyperscalers and the big users of the space, they need to know you can do it financially, right? You don't want to underestimate that either. It's not infinity in regard to capital for data centers. So I think Goodman will take an organic, once again, pragmatic approach (we've used that word a few times today) incentible approach over time. We'll roll out of assets, roll into other assets that are higher returns. The data centers we want to keep are the ones we call our critical essential infrastructure.
We're not going to keep more, but there'll be certain data center parks and programs around the world where we go, "That is irreplaceable. We want to keep that one. That's great for the next 20 years.
Okay. I'll leave it there. Thanks. Great for your comments.
Our next question comes from the line of Richard Jones with JP Morgan. Your line is open.
Oh, thank you. Thanks, Greg and Nick. Good discussion. Just interested if we can go back to discussing Development and revenue growth. Nick, I don't know whether you can kind of work through some of the component parts that we need to be aware of. I mean, if we look at this result versus the prior result, revenue's up 34%. But if you look at the contributing parts, you've got WIP, production levels, yield on cost are all flat. The exit yields are higher. Completions were down. And obviously, you've picked up in the amount of work being done on balance sheet, I think, from 19%-23%. So it just seems it's just hard to reconcile that growth based on those. I think you can just discuss that a little bit.
Yeah. So I think you've touched on all the various parameters that will be adjusted and modified. The other one is time of recognition, which is contract-dependent. So the short answer is it's going to be a combination of all of those. And it's going to be site by site, transaction by transaction. So there's really no easy formula I can give you other than what I said earlier that for the purpose of mathematical modelling, you can assume production rate around this level, margins maybe improving, and a proportionate share of what's originated on balance sheet remaining high and possibly increasing a little further. And that's what's going to drive the earnings growth. That's what we're managing towards, is getting earnings growth. How we get there, frankly speaking, is going to be a combination of all those factors. It's what we're managing.
Okay. Thank you. Can you maybe discuss the timing around Development profit realization for the data centers and how that might differentiate with traditional industrial developments?
It'll be. I'll make one comment. We'll pass over. Nick, the margins are bigger and the timeframes are longer. They will manifest them in ways which could be sales. It could be joint ventures. That could be with hyperscalers. Then there'll be partnerships with our own investor base. It'll manifest itself in a number of ways. If you have a big power bank and a big site in a location which we might go, "Great for data centers, but we're not there in 20 years' time. We don't want to own it," the margin on something like that could be very, very good. The amount of capital you're putting out is very, very, very small. So I think what Nick's described in regard to the way these things will manifest will not necessarily be linear and necessarily that easy for you to calculate.
Yeah. We'll have to just keep you updated as to how it's going. But the actual accounting for them is no different to the logistics developments that we're doing in the sense that the timing of recognition is going to be contract-dependent and in accordance with the standards. And that's no different to what we've been doing in the past. It's just then how do we contract each transaction? And that will vary depending on the situation and what's optimal at that point in time and what the situation is at that point in time. And the only other thing, Greg, I'd add to what you said is that it will also manifest in performance fee generation as well. Because when it's being delivered by a partnership or originated from within the partnership, the gains will come essentially below the line.
But eventually, that turns into performance fees for a proportionate share of that as well. So it's going to come through in a variety of different ways over a number of periods.
Okay. Thank you. One more quick one. Just, Greg, you called out that there are a lot of industrial developers transferring into data center developers. Yet you seem to be able to source opportunities at still what look to be very high yields on cost. But do you think those opportunities are going to be competed away? Or why do you think you've still been able to access those very high-yielding projects like you talked about, the LA port project?
Look, we already own them and have. If you send me out tomorrow to buy a data center site, that's got power written all over it, yeah, good luck. We won't even get close. We'll be a third of the bid price. So what we're mining at a data center is, quite frankly, what we own embedded in our businesses. And it's just this phase of intensification of use. We've done it with residential. There may be another opportunity with the residential here in Sydney, actually, as well with a lot of our South Sydney sites. But it's stuff we actually own. And when we talk about 4 gig and there's another gig probably working on, we actually own those sites. Many of them were owned for 20 years, 25 years in the U.S. Maybe some of it's three or four years old.
We haven't bought a data center site as long as I've ever been here. We've never bought a data center site. We've just bought really good real estate that gives back to you because it's in a great location, right? So good real estate gives back to you over time. Bad real estate takes away from you over time. That's a very simple rule that we live by at Goodman.
Great. Thanks, Greg.
Our next question comes from the line of James Druce with CLSA. Your line is open.
Good morning, Greg. Good morning, Nick. Just want to clarify something. It sounds like you're quite comfortable now ramping up turnkey data center development. So are you sort of saying that you're comfortable? You've got your head around the risks. And you've got the capital in tow now?
Yeah. Look, I don't think you ever get comfortable about developing anything, to be quite honest. I think you need to be on edge. You need to be focused. I think it comes down to the GCs, the general contractors. So for example, I was interviewing some general contractors in the U.S. recently. They give you a lot of confidence because they're building billions of dollars of this kit on an annual basis. Whereas we're a little more edgy and concerned in other markets where GCs are not doing the same volumes and doing the same full turnkey scenarios. Japan's another very good market with the U.S. as well. Where Europe, you've got to be and we're very, very careful what we're doing in Europe as we will be in Australia because the market is not as well tested as the U.S. or as Japan. So yeah, we're comfortable.
We know what's going in it. There's no big mystery. There's no sort of secret sauce that's going in there. We want to have data centers that primarily air-cooled, water-cooled, can do both primarily, adapt to AI as you need to, things like that. So water's actually really important as well as power. So I think that's just one to watch as you move forward. But no, we're just super focused on doing it well. And we're very happy to do one at a time. We've got a global team of engineers we've been building around data centers who are actually working across borders and across country. We're using best practices. We're using the best technologies we see. And we're obviously working with our customers to make sure we deliver what they want.
Right. That's clear. And just the capital for turnkey, that doesn't sound like something that you're uncomfortable with either.
Let's make sure we get the right return. If we don't, we won't be doing the specialized pieces. Because I'd go back to my earlier comment. I think in the U.S., someone was telling me that if you have a Powered Shell, that's a 6-cap rate growing at two. And if you have a full turnkey, that's 6.5. And that's growing at two. That doesn't make any sense. When the 6.5, the cost of building that is three times more than the Powered Shell. And there doesn't seem to be any depreciation in there. And if there is, it's not enough. So let's just be honest about the cash flows and understand what we're doing here. There's real estate components. There's real infrastructure components.
You need to evaluate it financially, honestly, and make sure the cash flows meet the objectives of the returns. I think Nick and I are all over that, Nicholas.
Certainly hope so.
Yes.
All right. And one more if I may. Do you guys have a rule of thumb for how long you expect, generally, the data centers to be in WIP for? Is it three years? Is it four years? Or is there anything like that you can talk to at the moment?
Yeah. The Powered Shell, you'll be through in two years, 18 months, right? So you get the Powered Shell. And then you may have some revenue coming off the Powered Shell. The balance will depend on the customer's drawdown and takedown, which could be a couple of years. Could be four years, depending on how many megawatts and where they want it and how they want to take it down. So there's elements of the second stage, which could be longer. But the first stage, it can be cash flow positive at that point is the way we're looking at it.
All right. And for turnkey, not Powered Shell? Or is that the extra two years you're talking about?
Yeah. There's different components to it. It depends on where you want to spend your capital and where the return is. Who you're dealing with. Because on the other side of these transactions are $2 trillion companies that actually have a lot of cash. So as we've found with warehouses, in some instances, we've had big customers that actually almost built our warehouse for us. So there's going to be big capital contributions, we believe, moving forward in our model, also from the hyperscalers because the amount of cash they have and the amount of capital and free cash flow they have is obviously enormous. So there'll be a combination of ways and methods and depending on who it is. A colocator, it could be totally different.
Okay. Thank you.
Our next question comes from the line of Ben Brayshaw with Barrenjoey. Your line is open.
Yes. Good morning. Thanks for the presentation. I just had a couple of quick questions. Greg, I was wondering if you could expand on what visibility you might have on the procurement of the additional 2 gig of power that you mentioned, just what stage you're at in terms of discussions with local authorities around having that, I guess, documentation put in place. And second, could I just clarify your comments as well? You're talking to AUD 50 billion in end value. I think you mentioned over five-seven years at the September quarterly update. You mentioned that delivery of the data center pipeline would likely take seven-10 years. So just trying to reconcile or understand how you're thinking about the timeframe of the delivery of the approximate 4 gig in power. Thanks.
Yeah. I'd take the last question first. Then we'll get back to the 2 gig we're working on at the moment. Look, I think it's because we're refining when we can get to cash flow. And I think we get to cash flow at Powered Shell, effectively. Then I think, as I said before, it's in two stages. So I think we can bring forward cash flow and probably bring forward some of the development profits, Nick, with Powered Shells. And if we're doing work with colocators, maybe the Powered Shell is the way to go because their credit is very different in due respect to them to, say, a hyperscaler. So we'll handle it differently as we go along. And our timeframes, I think we can pull in.
The other thing is the 2 GW we're talking about is mission critical to get timing and get them up as fast as we can. So we're looking at ways we can accelerate, build infrastructure early. We're actually scraping sites right now, knocking buildings over as we are actually planning these things. So I think we're going to actually get some time advantage. Time is critical right at the moment. The 2 GW you talked about, a lot of that's actually in advance negotiation discussion. And effectively, about 600 of it is actually our right. We haven't put it in the 2 GW number. It's our right to pull it down. We just need to negotiate the final outcome. But we've got an as-of-right position. The other thing, too, to remember that there's money going into the front end of this program.
So as you're pulling down power and you're committing to it, you're actually committing capital to it as well. And you're pulling it down and spending money. So it's economic for us to be sort of like locking down financially a couple of gig. The 600 I was talking about before, right at the moment, we don't have to. So we don't need to lock it down. Because that then means maybe there's another AUD 100 million goes out the door in regard to securing different things we need to secure, which might be transformers and things of that nature. So yeah, we're monitoring that very carefully. But it's not a hopeful number. It's a very secure number. And two's locked down. We're working on it. And we're actually spending money on a lot of those sites to get them going vertical second half of the year, beginning of 2025.
Yeah. Thanks, Greg. And just to my second question on delivery timeframe for the DC pipeline, you mentioned five-seven years. Previously, you talked seven-10. I was wondering if you could just comment on that, please.
Yeah. Well, what I said earlier, because we're doing Powered Shells, we're pulling them forward. And we're probably getting those cash flowed earlier. And that's the work we've done on the last six months about how we're going to build a bit of mousetrap effectively. We think we can pull that forward earlier, yeah.
Okay. Thanks for your time, Greg.
Thanks, mate.
Our next question comes from the line of David Pobucky with Macquarie. Your line is open.
Good morning, Greg, Nick, and team. Congrats on the strong results. If I can just go back to guidance and ask it in a slightly different way, please. What items are doing better than your expectations when you're guiding for 9%?
The development and the performance fee lines.
Thanks, Nick. In terms of occupancy, it's down slightly. Are there any drivers to call out for that and any read-through on tenant demand, please?
Yeah. We'll get an industrial question. That's good. No, demand's very good. The locations are tight. And I think there's no real reason around that. I think what to watch, though, moving forward is economies could weaken off a little bit. At the moment, they're actually pretty resilient. And that's why inflation's still hanging around, particularly in the U.S. and even in Australia. I think it's still pretty strong. But no, look, no major indicators. A lot of renewals going on. The thing that is helping industrial globally is because of the cost of capital argument, a lot of projects have been pulled up. So there's a bit of residual product needs to be filled. But there's not a lot behind it. So we're building in at the moment, if we're pulling something out of the ground, we're building into 2025 sort of completions and 2026s.
We're pretty comfortable with about 2025s and 2026s.
Thank you. Just last one from me around gearing increasing. Are there any other movements there to consider apart from devaluations? Thank you.
Yeah. I think it's just the net investment into the Development side. I mean, I think we talked about this before. Working capital allocation development, depending on where we are in the sales program and CapEx program, can impact. That's transient capital in a way. And what is sort of permanent capital is our co-investment in the partnerships or tends to be stickier. And so that's where we're sort of long-term focused. So that short-term working capital movements, I mean, I think we were up at 9.9% gearing or something this time last year. So yeah, it's up since June but down since last December. There's kind of gyrations. And then the structural bit is we don't pay out 100% of our operating profits. And we reinvest that back into the long-term holdings. And that's what keeps the gearing structurally in check.
Thank you. Good luck for the remainder of the year.
Thanks, Dave.
Our next question comes from the line of Alex Prineas with Morningstar. Your line is open.
Thank you. And thanks for the presentation. Just interested in your comments around how difficult it is to if someone wanted to go out and acquire a data center-powered site. At the moment, it's very difficult. Just sort of interested, based on the current land bank that you've got, if you were developing at your current run rate, how long would the current land bank last on the data center side?
Oh, look, good question. If we add we'll add another gig, we think, over the next 12-18 months, to be quite honest. Look, yeah, I'll be 70-odd, I expect, by the time we get there. And that's a good 10-12 years' time.
I was going to say, Greg, that's 40 years from now.
Yeah. Look, it's got a long tail. I think it's more importantly look at the demand side of it. I think that's more the poignant question. And look, talk to Microsoft and Google about that. But if you look at the demand side - and I like taking things in five-year chunks - I think we're going to be very, very busy on this for the next five. And then we'll look at it after that, but very busy in the next five. And we've got plenty of opportunity. Going back to what I said earlier, we own it. It's there. It's available. And we're just mining it and farming it effectively is what we've got to do. So good systems, good processes, good development processes is our big competitive advantage.
Thank you. That's it from me.
I'm showing no further questions at this time. I would now like to turn the conference back to Greg Goodman for closing remarks.
I'd just like to thank everyone for this morning. Good day.
This concludes today's conference call. Thank you all for participating. You may now disconnect.