Ladies and gentlemen, thank you for standing by, and welcome to the Goodman Group FY 'twenty one Results Call. At this time, all participants are just in a listen only mode. Following the presentation, there will be some time for a question and answer session today. And just please be advised that today's call is being recorded. But without further ado, I'll hand the conference over to our first speaker for today, Mr.
Greg Goodman, thank you. And please go ahead, Greg.
Thank you very much, Myles. Good morning and welcome everybody. I hope you're keeping safe and well in these very uncertain times. Nick Rhondda is with me on the call. Throughout the year, Goodman has remained flexible and adapted to the changing Enabling our business to deliver strong growth with the health and well-being of our people remaining a high priority.
We've continued to build on previous years with operating profit of $1,220,000,000 up 15% on last year. The result highlights strong growth in our development workbook, high demand from our customers and positive revaluation outcomes. Operating earnings per security for the year of $0.656 is up 14.1% on the previous year and statutory profit Came in at $2,300,000,000 when you include primarily the revaluations. Goodman is well capitalized with gearing at 6.8% and available liquidity of $1,900,000,000 including $900,000,000 in cash. Our partnerships importantly also have $18,000,000,000 available for future investment.
Market conditions are strong in our sector. Continued growth in the digital economy is giving our customers confidence to grow. Our global portfolio is well positioned to Our development workbook increased during the year to 10,600,000,000. Our global work in progress is It's been across 73 projects in 12 countries. And importantly, the development program has very strong margins.
The depth of demand is leading to a high level of pre commitments with work in progress at 70%, leased And an average lease term of 14 years. Projects completed in FY 2021 are almost 100% leased. Development undertaken on behalf of our partners remains consistent with prior periods at 81%. The activity is flowing through the partnership's performance and also the assets under management. Assets grew solidly through the year and now stand at RMB58 1,000,000,000 Our partnerships delivered average returns of 18 With solid income and capital growth.
With strong visibility into the development activity, we're forecasting growth growth in assets under management this year to an excess of $65,000,000,000 which in turn will be reflected in revenues in future periods. Regeneration of our existing brownfield sites is part of our global sustainability strategy given their lower impact on the environment. Developing brownfield sites decreases waste, preserves Greenfields land and generates jobs where people live. Reducing commute times and uses existing These sites represent more than half of our development land and will provide us with more development opportunities in future periods. One of our most important areas of focus this year Has been to integrate ESG initiatives into everything we do at Goodman.
We are focused on our long term sustainable approach That leads to positive economic environment and social outcomes for our business, our stakeholders and the world more broadly. This year, our global operations achieved carbon neutrality 4 years ahead of our target. Looking ahead, we're working with our contractors and customers to decarbonize our developments, a critical part of We've established a framework to calculate the embodied emissions from our development projects globally, which will allow us to reduce and offset this in the future. And finally, throughout the year, Goodman Foundation continued its efforts to help its partners support their communities around the world. Now I'll pass over to Nick for a few comments.
Thanks, Greg. Let's turn now to Slide 10 for the income statement. We'll first cover the operating profit and then discuss the non operating items at the bottom of the table. Overall, though, FX movements reduced The translated value of our foreign income when compared to last year, but this was collectively offset by the $58,000,000 benefit we got in the net borrowing costs. We'll go through the individual impacts along the way, but In aggregate, it's worth noting that operating EBIT was up by nearly $140,000,000 on a constant currency basis.
Looking specifically now at the movement in investment earnings. The average volume of directly owned assets is largely unchanged over the past 2 years. So our NPI has been stable. Investment income from our cornerstone interests in partnerships, on the other hand was down $15,000,000 over last year, and this was exactly equal to the FX translation effect. Underlying rental increases resulted in $13,000,000 of additional income to the group, which equates to like for like NPI growth of 3.2%.
The majority of this growth came through fixed increases, but we expect to see ongoing from market rental increases in the locations we operate in. This was offset by the impact of capital transactions, which resulted in a $13,000,000 reduction in income. Some of this was due to the positioning of assets for redevelopment, which meant that we've made them intentionally vacant. The timing of disposals relative to acquisitions and development completions was also a factor. It's worth pointing out that the disposal program has led to some return of capital to ourselves and our partners.
This slows the rate of income growth because we've reduced the amount of equity invested. And what equity we are investing is mainly going into development activity. Another significant driver is in recent years was that the net initial yield on the assets sold has been greater than that of We continue to focus our portfolios on what we believe will be the better properties within our chosen markets and that this will deliver rental growth and value creation opportunities to enhance total return in the long run. With ongoing investment and growth in like for like MPI, we expect our Cornerstone investment earnings to increase over time. Management revenue was down $52,000,000 this year, but $24,000,000 of that was driven by the FX translation effect.
Our net investments have been relatively stable, but it was the strong valuation gains over the year, especially in the second half, That was the biggest contributor to AUM growth. As a result, base management revenues grew by $20,000,000 over the year. Performance fees and transactional revenues contributed $149,000,000 this year, which is down by $48,000,000 over last year. Performance and activity levels in the partnerships continue to be strong. So this reduction has just been the result of the timing of revenue recognition.
We expect that fee revenue as a percentage of stabilized assets under management will average about 1% over time, which is in line with this FY 2021 result. Given the prospects for growth in AUM and the ongoing performance of the partnerships, We believe that there's scope for growth in management revenue. Realized development income for the group was nearly $720,000,000 for the year. This is up by over $140,000,000 year on year or $175,000,000 a constant currency basis. In addition, nearly $400,000,000 of development gains are recognized by the group as its share of revaluations.
As usual, the revaluation income sits outside of the operating profit. It does, however, demonstrate that we create significant value through the process of site identification, achieving planning outcomes and project delivery, and that we've continued to execute these core functions very well. Another feature of the developments that we've been highlighting recently is the impact of their larger scale and therefore longer time frames. This has resulted in the extension of the development period for Projects in WIP to an average of just over 19 months. That means our annualized production rate from WIP has increased from just under $4,000,000,000 a couple of years ago to $6,600,000,000 as at June 2021.
This increase in the volume of work is what's driving the revenue growth and providing enhanced visibility into our development earnings going forward. We remain enthusiastic about the demand prospects for our developments, so we expect to maintain strong activity levels in FY 2022, which bodes well for future revenue. As foreshadowed at the half year result, our borrowing costs were down $55,000,000 on last year. The stronger Australian dollar Over the course of the year, gave us a $58,000,000 benefit, which offsets the impact of the translation of the other line items we discussed earlier. This outcome is consistent with our hedging strategy that's been in place for a very long time now.
In some years, it's up and in other years, it's down. In FY 2020, for example, we had a $30,000,000 cost, which offset the translation benefits relating to the other line items in that year. The other main driver of this reduction in the expense was the repayment of high cost debt that has been occurring over the past couple of years. Partially offsetting that benefit is the reduction in interest earned from our cash on deposit and a reduction in capitalized interest. Our net weighted average cost debt is currently around 1%, so borrowing costs will remain low in the near term and any volatility probably come from FX movements.
Our tax expense was down due to the changing nature and origin of our income. As far as the non operating items are Turned. We saw our share of the total revaluation gains of $5,800,000,000 increase to $1,300,000,000 this year. Cap rate compression was again prevalent as were rental increases. As you can see, development valuation gains Also represented a significant portion of the total valuation result.
With the strength of demand for our assets and the contributions Development likely to continue, we believe the valuation growth will persist in the near term. As usual, we exclude the accounting cost of the long term incentive plan, but we include the tested units in the denominator when calculating our operating EPS. The main drivers of the movement in the share based payments Accounting costs has been the volatility in security price and other valuation parameters, and that's another reason why we treat this item the way we do. A few remarks now regarding the balance sheet on Slide 11. The strong Australian dollar reduced the translated value of our foreign net foreign assets and liabilities by 300,000,000 This was partially offset by the derivative mark to market gains flowing through the statutory income statement.
The increase in the wholly owned assets portfolio was partially driven by valuation gain, but there has been $160,000,000 added through net investment and transfers of assets upon completion of their development. Our share of the stabilized assets within the partnerships were up by around $860,000,000 Within that, our share of the valuation gain was $1,100,000,000 of which about $160,000,000 came from developments. Net investments and development completions added around $100,000,000 and offsetting this, we had the FX translation and mark to market impact of minus $300,000,000 Our development holdings are up by $500,000,000 overall. This is net of disposals and completions. We continue to fund the growing workbook across the group and the partnership.
Breaking this down, we added $300,000,000 through our share of the partnerships and $100,000,000 to our direct holdings. And then there were some non cash movements. There was a minus $100,000,000 impact from the FX translation And around $200,000,000 of valuation gains for properties that are still under development. Just pausing on that point. That includes $95,000,000 associated with properties that are subject to conditional contracts for sale.
You'll find this specific disclosure in the audited financial statements. It's occurred because the development process straddles more than 1 financial year. With the lengthening time frames of our projects, these situations like to become frequent. If and when those sales are completed, we'll reallocate those valuation gains to the operating profit calculation in future periods. They'll be offset against future valuation results, so we don't double count them.
This replicates the situation that arises when Properties are sold prior to their revaluation, which is what usually happens with quicker projects. Importantly, It remains consistent with the principle that operating profit is backed by cash. In terms of the direction of our working capital allocation going Forward, there are two things to consider. Firstly, development cash flow in any given period can vary depending on the point in the program we're at relative to the settlement process for new projects versus the older ones. And secondly, in terms of trend, we expect that working capital allocation to developments will continue to move up in the near term in light of the Given the confidence we have in the assets and the returns we're generating, we believe this to be a good use of funds at this time.
Our cash holdings decreased by around $860,000,000 over the year. This is mainly due to the repayment of around $1,000,000 of loans and U. S. Dollar bonds. We also utilized some of our cash to fund investments into our developments and equity the partnerships, but in the main, they were funded by retained earnings.
This is consistent with the design of our long term capital management plans and the distribution policy. There was also a minus $100,000,000 impact from FX on our foreign denominated cash holdings. As far as the borrowings are concerned, FX also had a minus $100,000,000 effect because it's all denominated in foreign currencies. This leaves us in a position where we're down to $2,000,000,000 of interest bearing liabilities. As a result, our net interest bearing Liabilities, net of cash, sits at just over $1,100,000,000 That's a good point to turn to Slide 12.
Consistent with our financial risk management objectives, we'll continue to operate our gearing within a range of 0% to 25% with the level to be set with reference to the mix of earnings and In light of the growth in development activities, we aim to maintain leverage in the bottom half of this range for the foreseeable future. Gearing is currently lower than it was this time last year. Please note that we're expecting to increase development capital allocation near term, And there are less asset sales from partnerships foreseen, so gearing is likely to be a little higher over the coming year. This is why our distribution per security is expected to remain at $0.30 for FY 2022, which will enable us to sustainably fund our proportionate interest in the assets we're developing
For a robust year in FY 2021, we expect current development activity and strong returns to continue for the group. We anticipate the impact of COVID to be with us during FY 2022 year and our adaptability and agility is going to be important. We've adjusted to this environment very well and it gives us confidence moving into this new financial year that we've already adjusted to the climate. The group is forecasting to deliver FY 2022 operating profit of approximately $1,360,000,000 up 11% on FY 2021 and operating EPS of $0.72 Up 10% on F 'twenty one year. Forecast distributions for F 'twenty two, as Nick pointed out, remain at $0.30 And just in closing, I'd like to thank you for attending this meeting, but also I'd like to thank The Goodman people around the world for delivering on this result in very, very unusual times So thank you very much.
And we are now moving to questions.
Miles. Thank you so much. Ladies and gentlemen, we'll begin that Q and A session. Our first question today comes from the line of Simon Chan from Morgan Stanley. So please ask
Good morning, Greg and Nick. First question, just How much Versiva disposals did you guys factor in for FY 'twenty two in your guidance? Because I noticed you guys sold about $3,000,000,000 or maybe a bit more last year. Just what should we be expecting this year?
Look, I think in the next 12 months, it's going to be minimal. I think we've done, Simon, what we wanted to do in the last 4 or 5 years. We've repositioned the portfolio globally. We have then positioned that capital back into the infill sites, which we wanted to do around the world. Those infill sites are now Starting to crank into production through 2022, 2023 and 2024.
So most of where we want to position the portfolio for growth It's done. So it will be relatively minor in the scheme of $65,000,000,000 to $67,000,000,000 of assets will be pretty
Great. Very clear. Thanks, mate. And then on your production rate of $6,500,000,000 or $6,600,000,000 Can you just give us a feel for when will that actually translate Through to completions, if at all. I mean, I'm just trying to reconcile this Production rate, you're going from 4,000,000,000 to 5,000,000,000,000 is now 6,600,000,000,000.
Yet your annual completions only gone from 1,500,000,000 to 2,500,000,000. And I acknowledge that stuff takes, you were saying, 19 months to complete. So are we close to the point perhaps Back end of FY 2022 when we should see a pretty noticeable uplift in completions and AUM?
Yes. Look, good question, Simon. I'll just make one comment. We're carrying a lot of work through this June 2021 into 2022. So we're starting 2022 very strongly, but I'll just pass Over to Nick for a few other comments.
Yes. That's spot on, Greg. So yes, I mean, so I think we flagged this A year ago that we'll go through this transition process because we're dropping off
a lot of shorter data projects and picking up a lot of longer data ones. And so until that normalizes, it will take a bit of time. But FY 2022, we expect that there will be another step up and then FY 2023, another step up again. That's the program.
Sorry, when you say another step up, a step up in what?
In completions. If the production rate remains around this 6, 6.5 level. Over time, the completion rate should be get pretty close to that. But it will take a couple of years for us to get to that normalized level. It won't all happen in 1 year.
Yes, yes. Okay. Fair enough. Fair enough. Mate, putting that together then, it's I'm just struggling to see how Your EPS growth expectation is only 10% for next year, right?
I mean, Greg said you're not going to be selling A material amount of assets. Your completions is going to go up, throwing a little bit of reval. Is there something else I'm missing in putting all that together?
Simon, I think we're looking at the world Pretty realistically, we've got a world which is difficult. You've got supply chains that are challenged. So we're just being We're just taking a sensible look at the world and putting a sensible number out, which we think $1,360,000,000 is a good number. It's cash. Operating profit, we would expect valuations to be also strong.
So we think it's just a prudent Full number at this point of the year.
Can I just pick up on the point you made there, Greg? Supply chain has been challenged. Is that increasing your manufacturing costs of your sheds, etcetera? Is that Certainly, when is the
line going? Yes. Good question. The out of the $10,600,000,000 there's about $3,500,000,000 in concrete, steel and construction. So it's actually not as volatile even with cost increases at the top line.
So land and profit risk is 65%, 70% of the equation at the moment. So look, not from a profitability point of view. I think from a timing point of view, you've got to be realistic this year that things With everyone dealing with the Delta strain, our slowdown in the certainly in the construction process In parts of the world, the good news for us is having a global portfolio and a global business, we can sort of work with those cycles as we We have been in the last 18 months. So I think 10% is a good number. It's a big number.
It's a sensible number at this time of the year.
So I'll next go to Lou Perenk from Jarden. Please ask your question, Lou.
Yes. Good morning. A few questions for me, if I may. 1st of all, on your dividend payout, I mean, you flagged quite well that you wanted to bring that down. Do you have a number in mind, Greg or Nick, where you kind of want that payout To be or should we just expect $0.30 for the next few years?
Yes. Look, it will sit around 40% There's a reality, Lew. There is a lot of money going into our development pipeline around the world. There is Probably an uptick on work in progress on $10,600,000,000 even closing in around $11,000,000,000 during the year As well. So there's just some really good opportunities for us globally that are big, they're infill, A lot of multi story.
So we think 40% for us, bearing in mind the growth we're experiencing And the demand we're experiencing from our customers is where it will sit.
Great. And then as you say, the majority of that retained earnings will go into development, but you did increase your stake in the GMT. So I just wanted to kind of see if there's more You're kind of seeing opportunities to take more stakes into your existing or future funds?
Yes. Look, as the assets under management, Lou, grow over time and have said they'll grow through $65,000,000,000 this year Pretty strongly. That, yes, there will be more investment in the partnerships as we go as well. Just remember, Goodman holds about $1,800,000,000 of assets on our balance sheet as well, which are rotating. Some of those are being Getting ready for development.
They will be developed and then that will free up additional cash for investment as well. So It's a combination of the two items, certainly as is on the balance sheet that are rotating, plus The retention of the cash flows.
Great. Thank you.
Your next question in queue comes from Sholto from Jefferies. So please ask your question, Sholto.
Good day. Thanks, everyone. Just touching on some of the points made. If you look at the production, 10,600,000,000 of WIP, averaging 6.6 1,000,000,000 in production based on the 19 months. It's not hard to see your development earnings being $900,000,000 to $1,000,000,000 with a 15% All in margin.
So just sort of trying to understand how you get to that guidance. Obviously, it seems a bit conservative Based on what you're saying around COVID and the timing and things like that, can you sort of elaborate on that sort of the development with and how you see that translate to earnings?
Yes. Look, good question. And I expect this will be a question we'll get all week. Look, we think 10% is a good number because it's a strong number backing up on a very good result this year. Its Cash flow and operating profit are very much aligned this year very, very close.
For 2022 will be the same. We think 10% is a good number. If during the year we feel more inclined, we're doing a little better, we'll let you and everyone else know. But we just think it's a good number. Is it conservative?
I think it's sensible for all the reasons I've outlined. But are we confident? Yes, we are very confident in the numbers we're putting forward to you
today. Okay. And then just on the payout, your flag your gearing did Tick up a little bit from December, about 200 basis points, but you had net debt broadly unchanged. But The a lot of was that and the revalves are quite strong. So was that just the FX impact that made that at the translation at the end That made that gearing a bit higher.
Nick, do you want to jump on that one?
Yes. FX Did affect it because it did tick down just right at the end of the financial year. And then the rest of it was just the net cash flow movements.
And then just I guess it's a good signal. When you've kept your dividend flat for several years now, and you're saying you're obviously the wind is going to smash through 11. So that and you'll flag an increasing gearing. So I guess you're pretty confident that you're going to keep investing more into the partnership Developments, hence why the payout ratio remain low, so you can keep growing your share of that pipeline. So you're comfortable leaving the dividend flat for a couple of years until you grow into while that investment is elevated?
Yes. Well, look, we're talking about this year. So why don't we just deal with this year? We're comfortable at $0.30 Because we think that then provides the capital to grow the business. In saying that, we are seeing really, really strong customer demand.
And the longer the world is disrupted, the stronger that demand will get. And effectively, we're seeing that in all our regions around the world. We've got demand that's 2 or 3 deep per project effectively. So you will see us That demand is strong. You will see us putting product into the market to make sure we cater for very, very good customers In the portfolio and in doing so, we're pulling forward sites that we thought we might develop in a year or 2's time.
I think they're going to be activated earlier as well. A lot of that is infill as well. So we're in a pretty robust environment Good morning, around that development business. We just need to manage obviously the capital going into it and making sure that we're Managing the balance sheet conservatively, which is where we want it to be, bearing in mind we have a lot of active earnings in the P and L.
Yes. And then just sort of on the P and L, I know you flagged the management earning part from asset sales and currency, but also The timing of performance fees, so would the some get pushed into FY 'twenty two in the first half, did they? And what was the number of performances? I think you said in the call 149 this year, so 48 down That
was the number. I think you want to look at primarily we gave you a number for the average Performance of the partnerships, I think it's 18%. We believe this year will be another very, very strong year as was The last 2 years of mid teens performance, I think, extrapolate that out and you could imagine that we are Pretty strong in regard to aggregate performance moving forward, certainly if The conditions prevail. So the business is performing well. The partnerships are performing well.
And there's a big buildup of performance in all those partnerships, Primarily all around the world.
Yes. And then finally, how much was this made for Nick, With an undevelopment profit of $7.18,000,000 how much was non cash again that was I may have misheard that on the call, which is obviously a timing issue before they complete?
Nick, you can see the level.
Yes. So The number you're referring to, Sholto, that's in relation to the conditionally contracted Properties, whether we have the revaluation? Yes, so $95,000,000
Okay. And what was the one last year? What was it last year? Do you have the PCP number?
There wasn't last year. It was the year before. It was about $19,000,000 So in FY 'nineteen, We had $19,000,000 that was conditionally contracted that then got treated the way we Consistently, in FY 2020. In FY 2021, there was no reversal, but We've got the $95,000,000 so that over the next couple of years that will come out in the operating profit.
Yes. But To be clear, there was no $95,000,000 $700,000,000 of development operating profit.
Correct. Okay.
That's all in that number. Okay. Okay. All right. Thanks.
Good result. Thanks, everyone.
Thank you. Okay. We have another So we'll next go to James Drus from CLSA. So please ask your question, James.
Hey, good morning,
My first question is actually pretty basic. Just wanted to get some color of the on the distribution of the WIP. So how much of the $10,000,000,000 or so would be in The top five assets, say?
Look, it will be well spread. It's well spread around the world. I think there's 73 projects, but the projects are just getting bigger. So on average a project is $120,000,000 or $130,000,000 now.
Okay. And then as a follow-up, just talking to some of the buckets of Demand, is there anything to call out across farmer, e commerce and fresh food over the period?
Yes, all of the above. Pharma obviously is for all sorts of reasons, including Vaccine storage and things of that nature. But look, I think you're going to find healthcare and things like that is a big sector and we're seeing that grow pretty strongly. We're the longer this pandemic goes, the more entrenched the way we're living also Means that we're spending more online and we think we'll do so. So that's accelerating the trends.
And I think the world will be at 40% Online sales through retail sooner than was forecast 12, 18 months ago. So we're seeing big, big moves in getting supply chains ready for that, getting supply chains ready so they're not vulnerable. So we're seeing a tremendous amount of work going on in ecom and we're seeing it now in fresh as well, which I think there's a lot of articles and A lot of talk about fresh and that's happening globally. The pharma has been probably last 6, 9 months, big move on pharma, yes.
Okay. And then finally, just a question around data centers. How do you describe what you're sort of doing in that space at the moment? Is it like adjacency or a new product of good real estate. And can you sort of talk to the customer set in data centers, which is A potential customer for Goodman Group?
Yes. Look, they're the big guys around the world. So the biggest data center operators are the The Amazons and people of that, Elk, the Equinixes and so it's Elk. What we tend to do and do in Most cases, if we're going to own the asset, long term, we'll build a pretty generic building that stores Data. And if it's not storing data, it can be storing goods.
And I think we've done that pretty effectively over the last 12 years when we've been operating in this sector. So we're not pulling it out as a special sector for Goodman. It's storage, Not of boxes, but of data racks. And we build primarily if we're going to own them long term, Generic buildings from time to time, if the building is a bit specialized, we might sell the land or we might do a land lease For 25, 30 years to the customer and then they can build what they want to build. So we handle it in different ways, but we're not Building specialized buildings for data center, what we are doing is building buildings that are generic, which stores Data, which can convert to something else in the future, is the way we approach it from an investment point of view.
Okay. Thank you.
Okay. Your next question in queue comes from Richard Jones from JPMorgan. Sir, please ask your question, Richard.
Good morning, Greg. We're obviously seeing phenomenal investment demand for industrial assets in Australia. Can you put The demand in Australia in a global context, how does it compare to the other markets you're operating in?
Yes, good question. It's the same everywhere. It's the most popular asset class Globally at the moment, I think these numbers all around the world that sort of bear that out. So it doesn't matter whether you're in the U. S, China, effectively in Europe, there's a lot of money, a lot of capital being raised, Primarily for core assets.
So we don't the development activity and the amount of competitors really hasn't changed. It's the Same people, few different faces, but that's always remained relatively competitive. But around core assets, Big, big demand globally. And I think, Richard, we mark the book to 4.3% globally as the global cap rate. That was $5,800,000,000 revaluations globally for our partners and Goodman.
I think you'll see that will Again, this year, primarily off the back of real growth in cash flows, we're seeing a Goodman partnership level, very, very good market rental growth because we've chosen our locations and backed them and that's paying off. So There's a lot of 4%, 5% and 6% sort of growth rates now coming in a lot of markets, which will impact then the valuations over the next A few years moving forward. So I think valuations are going to Goodman. We'll have another pretty solid year, but the amount of money you're For core industrial, it's very, very strong.
Okay. And then just on the development work, Well, you talked, I think, in the last couple of quarters about a significant ramp up coming in the U. S. And sort of a gradual ramp up in the U. K.
Hasn't seemed to have happened or been a big driver of the growth in WIP in the last couple of quarters. So should we Should we expect FY 2022 to see the U. S. Become a more significant contributor? I think you talked previously more than a build of starts Your turn.
Yes. Look, that is in the process starting in the next month or 2. We've got one site, Which we have graded ready to go. That's about $600,000,000 There's another site we're pre letting. That's about another $600,000,000 So those are going to kick off in the This half primarily.
We're just regulating what we're doing sensibly. We're watching, obviously, construction costs around the world. But for us, it's not so much around the cost. It's more around the timing. There's plenty of margin in it.
Getting the timing right, we're buying steel ahead of time. We're doing things that are smart by Procuring things at better prices and in bulk and things like that. So I think from our point of view, pretty comfortable with work in progress 10,600,000,000 in during the reporting date. But yes, we've got a lot of stuff to kick off This half and the second half of the year, which will basically maintain, I think, as we've said, a pretty big work in progress number over the next year or 2 in that 10 probably $10,000,000,000 to $11,000,000,000 range, which then if you extrapolate that out, which most of It's being owned by our partners. Extrapolate that out, it gives you a pretty strong growth in your assets under management, probably around that 12% to 14% a year.
When you strap on some valuations, we'll be through $70,000,000,000 in the 2023 financial year.
Okay. We've got another question in queue. I'll next go to
So Nick, just wanted to go back to the question around the development income accounting, the €95,000,000 number. Can you just run through how exactly that will come through earnings over the next few years? Like will it sort of be a negative reval in a way, but Coming through earnings? Is that the way to think of it?
Yes. Nick, you got that?
Yes. Just Getting myself off mute. Yes, Suraj, that's exactly right. It effectively will be a negative rebound because we don't want to Count it, right? So if we don't do that in the future year when you add it up over a number of years, you'll end up with more profit than we've actually generated.
But so in the statutory Financial statements, we'll keep tracking that for you, so you can continue to follow it and it's part of the audited Audit process, so the numbers are verified. But then when we do our operating profit reconciliation, It'll be a notional reallocation as a negative reval in a future period when we bring it above the line to operating at the time when the asset sale is And only when it's completed. If it doesn't, obviously, we won't.
Okay. And are there Sort of similar deals that we should expect to occur in the future? Or this was more sort of one off in nature?
I think I think you got it. Yes, yes, I think it will become more prevalent. Like I said, we had one in One deal in 2029 is a few here and there's a few in the pipe that could go the same way as well. So we'll have to keep calling it out So that it's clear. But yes, I expect that there will be more of these in the future.
Okay. Maybe Greg, just one for you. On The brownfield development sites, you obviously talked about the environmental benefits. But I'm just wondering if you can clarify how Generally, how that is higher margin than other industrial projects?
Yes. Look, I think the barriers for entry, whether it's just Way, way higher. The land is in the main because of the location of the property in around the major cities just way, way higher. And the time and planning is way, way longer. So some of these projects, we've just bought a couple of sites In the last few weeks, a few 100,000,000 Sterling and U.
S, Fundamentally, they won't be in the development pipeline till about 2024, 2025. By the time we demolish Plan once a day to send the sites, we're going to power it up and all that sort of carry on. So yes, they just take longer. So you want more profit and risk because you need it and that's the way we play it. But most of what we're looking at the moment is very, very little as Greenfield ready to go.
Most of it is long term strategic, 7 to 10 years, some of it out. So you might have income before or 5, you knocked the buildings over within 6. By that time, you've got it planned and ready to go and then Yes, in and out, 8 years. A lot of the stuff we're doing now, we're making decisions on 8 years' time. And I think that's when you look at our workbook now, that was Because of decisions we made, some of those 20 years ago and some of them actually 30 years ago.
And That's just the way we think. It's part of what we really like doing. We like trying to pick the good stuff Backing the trends we're seeing for the next 8, 9 years is the way we like to operate, Which then means, the competition around the world that is doing that, there's 1s and 2s The people that think the way we think and you know who those are. So effectively, there's not 15. There might be 1 or 2 people that really take the long term view And the fundamental real estate people, to be honest, not financing transactions All core buyers, they're real estate people that think about these things deliberately and very intimately over a long period of time.
Sure, sure. That makes sense. And just one final one for you, Greg. In terms of gearing, I understand the policy is unchanged, 0% to 25%. But obviously, we've been through a pandemic.
The outlook for industrial properties clearly very strong and asset values are rising. So I'm wondering why still maintain a conservative stance on gearing? Why not this increase it slightly, but within the range?
Probably been too long in the industry to believe things won't change and Effectively as well that if you look at our P and L, it's a lot of active earnings, Management, management fees, performance fees, a lot of development revenues. And we just don't think Goodman Group There's an entity that should carry a lot of leverage. So I think the net debt equation of about $1,000,000,000 is really, really good and it makes me sleep at night. So it might be a little higher than that from time to time, but it won't be a lot higher. I think the average leverage though around the partnerships is also worth the note, it's 18%.
And that's where we're running anywhere between 2018 early 20s for the partnerships globally. And once again, we're selling that to the Partners is being prudent and we're more concentrated on really getting good sites that can regenerate good long term returns. And that means if we do strip on some lower yielding, Good and fill sites that might be yielding 3% or 4% for a period of time. They can carry those with cash flow covers and things like that till they get to the development Sage, most of our partnerships around the world have got pretty substantial development books as well. So I think you've got to look at the gearing and the gearing the partnership In context of what we're doing, as you know, we're not big core buyers.
We're value add buyers pretty much exclusively now.
Okay. Makes sense. Thanks a lot.
Your next question comes from the line of Grant MacAskill from UBS. Please ask your question, Grant.
Good morning, Greg and Nick. I guess it's sort of follow ups on from your remarks and around setting the business up for the long term. I see your LTI is now less over a 10 year period, which I think is a pretty strong signal. Can I sort of get you better understand that Financial implications in the short and medium term in regards to the quantum and the impacts on the P and L from shares being issued and The non cash expense running through the P and L, I know this is difficult to forecast, but maybe one for Nick?
Yes. I'll make a couple of I mean, firstly, I think the first thing is Goodman Group will maintain the 5 year plan. So That will be 90% of the population, 95% of the population. It's a good plan. It's appropriate.
The 10 year plan is being Taken up by about 22 people. Those are the people that are running big Operations in the world around the world are assisting running big operations around the world. And importantly, at Goodman Group, We want to make sure that all people in our business are partners, but in particular, those people that are actually influencing The program and those 10 year decisions on the land and the way they behave and the way they treat the environment, We believe it's appropriate that they take a really long term view. They tend to be very entrepreneurial people. They tend to back themselves, which is good.
And they're very, very high quality in regard to our industry with a great depth of knowledge. So it's not across the whole business. It's a portion of the population that are entrepreneurial. It's a scheme that is very strongly in favor of the company. I think for the employees, if you ask them honestly, the 5 year scheme is a better one for them.
With a lot more certainty, I think this one carries more risk And you need to back yourself and you need to make good long term decisions, which is exactly where we're driving to. There's a So a lot of short termism in the industrial sector at the moment, probably a lot of sectors, no different to technology and other sectors as well. We want to drive through all that sort of nonsense and we want to make sure that our people are making good decisions for our Investors and stakeholders for the very long term. Now to the accounting and the financial impacts, Nick, you can handle it. But it's look, It's the dilution impact, bearing in mind the period of time is going to be Pretty marginal compared to the 5 year plan, Nick?
Yes. Thanks. Thanks Grant for that great question. I think Greg I think the thing I'd like to focus everyone on is the dilution. I think Greg is right.
That's something that we can reliably measure. And what we'll encourage people to do is, if you believe that we're going to generate 10% per annum EPS growth, which is now The hurdle for full vesting, so it's up from what it previously was. If you believe we're going to do that, there are limits on how much Stock we can grant under the rights. It maxes out at 1% per annum dilution. So If you put that into your projections, then it can be no worse than that, frankly.
And I think that's the reliable measure. We can count the number of securities reliably. I think the accounting cost and how that moves around the P and L, I spend zero time thinking about Forecasting it, I really don't think it in my opinion and in the company's opinion, it doesn't accurately reflect the cost to investors. It's just in my opinion, a relatively meaningless number, frankly. So it could go up, it could go down, Depends on the stock price.
It depends on the gammas, the deltas and the vegas. And honestly, we probably don't really need to spend a lot of time thinking about it.
No, that's great. You sort of answered it with the dilution comment, the 1%, but it's good to hear that LTI over 10 year period should
Your next question comes from Benjamin Brayshore from Barren Joey. Please ask your question, Benjamin.
Good morning, Greg and Nikas. Just a question on your development book. Just in Slide 36, Are you forecasting a yield on costs or project commencements of basically 40 basis points higher And 6 months ago, up to 6.7%. I was just wondering if you could just comment around What's driven the increase and broadly your expectations or where you see that trending over the next 12 months?
Yes. Look, good question. I think the 6.7 is a function of making good long term decisions on sites A number of years ago, and I think go back to my earlier comments where we're rebasing the portfolio looking at where we wanted our partners Owning real estate, and we had a good hard look at it. And at the time we were selling, we were also buying Closer and in high growth markets. And I think we're doing that again today, right now, With a view of 5 years' time.
And I think if we keep honest and we Stay true to the process, and we buy not for expediency, but we buy for long term performance. I think you'll find that we'll be doing pretty well on that line. That might be 6.7%. I think that's a really good number. But it will be in the 6s, I suspect.
But the exits are probably I think the $10,600,000,000 numbers on exits of 4.7 Well, you could quite easily see those exits being 4.2 not 4.7. So that 10.6 might have a little bit more in it. I suspect when we actually get to mark to market effectively through the process. So look, yes, I think we We'll maintain, 6s for a while longer, but it's all benched against where you think the exit is. And probably the exit So that global portfolio we're building at the moment is no worse than 4, and it's probably unashamedly some of the best stuff being made in the world and it would be some of the best available for our partners in the world as well.
And Greg, in terms of underwriting assumptions on land that you're currently active on And so far as acquisition is concerned, are you able to comment on your incremental yield on cost?
Yes. Look, I think if something's near term and it's easy, right, that would Probably be a rarity for us because nothing we seem to do is easy. But that's got a 5 in front of it. If things are hard and long and like I say, things we're buying today, we won't even be In production probably for 3 or 4 years. I think we've been down in South Sydney working with Planners and counsel on 1 multi story site for 3 years now and probably go another 6, 9 months, because you're going through a design award program now.
So Good stuff takes time and but then you've got this wall of demand coming through that wants the good stuff And what's it now? And it's really in a scenario globally where it's undersupplied. So if you look And you're looking at stuff in the Bronx or through Jersey to go and actually get a contemporary modern warehouse Yes, it might be 1 or 2 available, the same in most of our markets around the world. So the tensions on the rent and the cash flow growth. So I think if we keep getting the cash flow growth in those locations of say 4% or 5%, beating the 2% to 3 Yes, I speak by the time you get through the production, you're in that you're still in that sort of range.
Thanks, Greg. Okay. Your next question comes from Alex Prynneas from Morningstar. Please ask your question, Alex.
Yes, good morning. Thanks for the presentation. Just I guess following up on that last Question in terms of the sort of modernization of supply chains and Increasing investment in e commerce. There are differences there's a journey going on where retailers Are there differences around the world in terms of how retailers are in that journey?
Yes. Look, it's fair to say and good question. It's fair to say, if you look at Europe and the U. S, way more advanced Then Australia, China is the same actually. I think just look at the penetration rates over there in regard to e comm through 30%.
Here, I think we're still in the mid teens, might have spiked a little bit up because of people being locked in their houses in Sydney and Melbourne and Queensland. But effectively, yes, we're quite a few years behind and we're seeing work we're doing now in Sydney that This is going to cater for the next 3 or 4 years to get to the sort of penetration rates where we're sitting in the U. S. And Europe. So I think we've got a long way to go here.
And when I look at the workbook and the number of big boxes and automated sheds and things of that nature, Certainly see a big pile of demand coming through. I think the thing is going to be The amount of land and the amount of infill sites and the amount of development you can actually get ready because of planning and infrastructure is going to be the constraint, But it won't be the demand, I suspect.
Okay. Thanks for that.
Okay. We've got another question. So I'll go to Peter Davidson from Pendal. So please ask
Look, I just wondered if
you could decompose the like for like rent growth at 3.2 Across the geographies. Maybe talk about what's happening with market rents? And also a query, is some of your portfolio under rented? And if so, by how much? And then finally, have you got all this Nick?
And then the last one is just the leasing spreads like what's happening where you get vacancy and re let, so are you getting the bumps? And I guess the whole drift of that question is really around these cap rates, which are very fine. Behind those cap rates is implied or expected Market rent growth and so they're in the query.
Yes. No, no, good. I'll answer the last question first. 4 cap works if you got 4 growth. 4 cap doesn't work if you got 0 growth, in my opinion.
That might be different in some investment houses, but that's the way we look at it. And effectively, you'll see the like and like with 3.2 that is being held back Effectively by the construct of the leases, which might be fixed bumps or might be CPI plus margin type markets running ahead of the like for like probably by a good 1% or 2%. Some markets in the world, it's almost double that. Because I go back to the scenario, in the big infill markets Around the world, around the big cities, there is more demand than there is supply and you can't get supply quickly enough as well. And planning And environmental concerns in regard to what everyone's doing is also going to make it a longer term program as well.
So you're going to Have this scenario, I think, particularly in the locations we are globally, where you're not going to be able to meet that demand quickly And effectively planning environmental issues means it takes longer visavis you need more rent and you also need more Capital and patience, which I think is what we've got abundance of. I think patience is the big thing. Nick, do you want to hit a couple of those other points just around The rent growth? Oh, just on locations, Pete. If you look at our numbers around the world, Japan is probably We're actually getting 1 now.
That's more like rental growth, maybe even 2. But where the rent growth is really strong is U. K, But particularly infill U. K, U. S.
Where you've had almost a double digit for the year in infill locations. Australia is starting to see it begin infill, a little less so in greenfield. Effectively, China has bounced back pretty well. So they're in the 4%, 5% range. Hong Kong has been pretty flat for the year, To be clear, so that's diluting the number a little bit, but now that is with not a lot of supply going into the market, they're starting to bounce back.
But U. S, UK, Europe's with a 0 negative bond 10 year treasury rate and very low inflation. That's obviously Yes. And the good and feel is probably more like the 2% to 3% range. But Nick, would you like to make some further comments?
I think you covered actually most of it. Specifically, Pete, you asked about the reversions Well, I think that was the other part of the question. So I think it goes with the rental growth that Greg was talking about. Big reversion is happening in U. S.
I mean, we don't have a huge reversionary portfolio now because it's still growing. Most of it's coming through the Development business. But as we are starting to get to reversions, they are quite significant. The South Sydney market, big reversions, double digit type numbers. So In those locations, we are seeing pretty strong reversions.
The rest of them are a little bit closer to the like for like.
Okay. All right. Thanks, guys. Thank you.
Thanks, Pete.
And your last question comes from Stuart MacLean from Macquarie. So please ask your questions, Stuart.
Good morning. I appreciate the time. So I'll try to make these relatively quick. The $65,000,000,000 of AUM And that you're targeting to go through, does that just assume income growth on the rebalance side of things and the remainder are driven by Completions?
Yes, pretty much. That's right. I think when we're looking at forecasting Valuation growth this year, we're primarily looking at the wrinkle growth come through. I think it will be a combination of both, though, to be honest. I don't think our book at 4.3 is finished yet.
I think it's better than that when you look at what's happening at the moment. So I expect there will be The combination of the 2 be rental growth. To Pete's question before, yes, in our view, 4 caps The 4 caps only if you can actually get good growth. There's not 4 caps if you can't. So I think you want to see that rental growth coming through, but I also think there's Probably 20, 30 points in it as well, just where we're seeing things getting marked around the world now and where we're seeing things Trade at volume, certainly, it's good industrial global cap rates 4% currently.
Great. Thank you. And then on Slide 28, has the development the measurement of development margin, it seems like it's grown by 8% to 75% over the last 5 years. What's the trajectory there? How do you think about that operating expense line item going forward?
Nick, you can grab that one if you want.
Yes. Look, I think if you're trying to extrapolate from That revenue and cost of goods sold equation, it's not going to help you that much because That is dependent upon the nature of the contracts and the mix of the types of developments we're doing. Some of them is Profit on sale, some of it is fixed price contract, some of it is fee for service and related. So I think you should just look at the net line and look at it relative to the production rate, look at it relative to return on assets and overall Sort of margins on the projects rather than trying to extrapolate that line item, because it can be quite volatile. If you look back over the years, it has moved around significantly Depending on how we structure the transactions.
So I encourage you to look at it that way rather than trying to extrapolate out from Yes.
So it's more about Slide 28, management and development income was $1,200,000,000 operating We're almost $300,000,000 so 75 percent margin. Do you expect operating expenses to now start growing in line with management and development income? Or should we expect kind of flat operating expenses of that $294,000,000 number going forward?
Yes. Look, the total I can grab that one if you want. I think from a cost point of view, we've got really good infrastructure from people around the world. I think also with the 10 year plan, there's a lot of people that are going to give the risk of their career to Goodman, which I think is great. And effectively, we've got a very solid cost base.
And incrementally, around assets under management and And development, we can do more with the cost base we've got. So it will grow as we add people, but it won't grow to the extent Anywhere near where the revenues will grow. And effectively, we have a margin over cost of probably 80%, 90% is the reality because of Good infrastructure we've already got all around the world.
Great. Thank you. And a final one from me. Greg, you mentioned that WIP will be circa $10,000,000,000 to $11,000,000,000 going forward, production rate around that 6.5 Kind of give or take over the next couple of years. Development has been the driver of earnings.
And so eventually, if WIP stops growing. How do we kind of sit back and think about growth for Goodman On a 3 to 5 year view, and I'm not expecting guidance, but if development earnings might not be growing, what does that mean more broadly for the business? And how do you count to that?
Yes. I think you'll see it through the investment line and hopefully growth in cash flow because of the Locations we've chosen, so we think that will start to stand out. But the big driver is The assets under management where for the last 6 to 7 years, we've had the handbrake on effectively because we've been selling I think $25,000,000,000 of assets. And we've built our way through it by cranking up the development side of the business, which was a sensible thing to do with the change and the structural change we've seen in industrial. But if you look forward 3 to 5, you could imagine assets under management Sitting in $100,000,000 You could see close to $1,000,000,000 of revenues coming off those $100,000,000,000 by themselves.
And I think the other thing on development, we're in a very big world. You've got to apply $0.73 Sort of U. S. Type dollar value in Australia to the U. S.
Dollars. And effectively, can we do US5 US1000000000 dollars US7 billion dollars globally pretty consistently around the world. Yes, we can. We've then extrapolates out to US10 billion dollars plus, Particularly with what we're seeing around the world on the structural demand and the way people's lives Changing, which have been accelerated through COVID. And when we talk about through COVID, quite frankly, we're going to have to learn to live with COVID.
I don't think it goes away anytime soon. So those trends we're seeing are only accelerating. Our customers are more determined. And we're peddling pretty hard to make sure we can cater for them and have the right locations. So I think you'll see a 4 or 5 year development program pretty large, but you'll see the assets under management growing, which will start to move the earnings Profile back to management, not away from development, but the percentages and management will just be bigger.
We think development will be consistent, pretty consistent and will still grow quite strongly.
Great. Thank you. That's all for me.
Thanks, mate.
With that, there's no further questions. So I'll hand the call back to you now, Greg, for any concluding remarks.
Look, thank you, Simon, and thank you very much everyone for your time that's gone through the hour. So that must be a good session.