Thank you all for standing by, and welcome to the Goodman Group FY 2022 full year results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question at that time, you'll need to press star, then one on your telephone keypad. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker, Mr. Greg Goodman, CEO. Thank you. Please go ahead.
Thank you. Good morning and welcome, everybody. I have Nick Vrondas here this morning with me on the call. Firstly, I'd like to begin by acknowledging the traditional owners of this land on which I'm presenting from today, the Gadigal people of the Eora Nation, and pay my respects to elders, past and present.
Goodman has delivered a strong FY 2022 result with operating profit of AUD 1.5 billion and operating earnings per security at AUD 0.813, up 24% on the last financial year. Statutory profit was AUD 3.4 billion, up 48%. This includes the group's share of AUD 8.5 billion of valuation gains. We continue to be prudent and patient with our capital. Gearing remains low at 8.5%, while the group has over AUD 2.8 billion of liquidity available.
By focusing our portfolio and development workbook on key infill locations, we're seeing very high demand. Little to no vacancy and accelerated market rental growth. This has contributed to the growth and outperformance of our partnerships, which delivered an impressive return of 21% on average. As a result, all areas have contributed to the group's solid performance, with investment earnings up 20%, management earnings up 28%, and development earnings up 34%.
Our customers are dealing with inflation and cost increases around the world, so we're helping them to be more productive and sustainable in their supply chains. We're working closely with our customers to optimize space, leverage technology, provide strategic locations that lower transport requirements, costs, and delivery times. The volume, scale, and value of our developments has increased. Work in progress is now AUD 13.6 billion, which is up 28% on last year.
We're seeing good opportunities in our development program around the world with 85 projects on the go. Developments with 99% lease on completion with an average lease term of 12.2 years. Construction costs have continued to increase globally. However, margins remain strong as accelerating rental growth is outpacing impact of these increases.
Consistent execution of our development workbook and value add across our sites is contributing to margins and offsetting cost pressures. Total assets under management have increased to AUD 73 billion, supported by strong revaluation gains, development completions, and acquisitions. We have AUD 18 billion of undrawn capital and average gearing in the partnerships of 17.5%. This provides plenty of support for growth as we continue to look for opportunities to provide deep long-term value for our partners and investors. Property fundamentals remain strong in our markets with very high occupancy of 99%.
Customer demand and low levels of supply have seen market rental growth accelerating. As a result, passing rent reversion to market across our portfolio continues to expand. North America is the largest at over 40%. Australia and New Zealand at around 20%. Continental Europe and U.K. at 18%. Asia has been more subdued at 4%. Turning to Slide . Goodman is proactively responding to and delivering on our ESG commitments.
We're taking action by reducing carbon emissions, regenerating infill sites, using renewable energy, developing greener buildings, building more equitable supply chains, and through the Goodman Foundation, partnering with community groups where we distributed AUD 11.6 million throughout the year. Working with our customers and reducing our carbon emissions remains our priority. We have our carbon reduction targets validated by the Science Based Targets initiative. We're also on track to maintain carbon neutrality for our operations. Importantly, we're addressing the embodied carbon in our developments and investigating low carbon materials. Now I'll hand over to Nick, who will take us through the results overview.
Thank you, Greg. Let's turn directly to Slide 10, please, to look at the income statement. We'll first cover the items that relate to our cash-based measure of earnings, which we call operating profit, and then discuss the items at the bottom of the table. We've used this same cash-based measure consistently for over 15 years, and we continue to believe that it's the best representation of performance on realized profits.
It excludes fair market value gains on properties that are unrealized. It also excludes mark-to-market movements on our hedges and the accounting fair value estimate relating to our employee long-term incentive plan. Overall, FX movements have not had a material impact on the translation of our foreign income when compared to the prior year, so we can just focus on the key operational drivers of the results.
Looking specifically now in the movement in investment earnings, we've seen an increase of AUD 83 million or 20% on this segment over the year. Net rental income from the directly owned assets is AUD 24 million higher. This was due mostly to the addition of AUD 250 million of stabilized assets over the past 24 months through net acquisitions and development completions. We had nearly AUD 570 million of property inventory completed, but at the same time, we sold investment properties and have taken some offline to commence their redevelopment. It's been typical in the past few years that we accumulate inventory until we can optimize our exit. These completed assets generate rent while on the balance sheet.
As previously indicated, the growth in the workbook in the past couple of years has resulted in a commensurate increase in the working capital allocated to development. The net cash investment that added to in-inventories is reflected in our operating cash flow in the statutory financial statements. This was by far and away the largest cause of the difference between operating profit and operating cash flow for the period. Given the nature of these assets, some of them will come out of the portfolio, and so, too, will the rent they generate. We don't expect to see this part of the income growing over the next few years. The other part of our investment income comes through our Cornerstone interest in the partnerships.
Over time, we wanna grow this part of the business as we continue to expand our portfolio of assets under management and our investment in it. We also expect growth in rental rates to add to our income. Compared to last year, Cornerstone investment income increased by AUD 59 million or 18%. Rental growth accounted for AUD 17 million of the increase, which is the result of the like-for-like NPI comparative.
The net impact of acquisitions, disposals, and development completions contributed AUD 42 million of the growth. Over the past 24 months, we have invested a net AUD 1.7 billion into the partnerships globally, AUD 1.2 billion of which occurred in the past 12 months. The majority of these investments have been for the purpose of acquiring development sites and funding development CapEx.
The remainder was related to acquisition of income-producing assets that are either for future value add or redevelopment, or the acquisition of completed assets from the group. The average income return on our capital contributions to the partnerships has been relatively consistent at around 4%, with the low initial yield on their acquisitions being offset by development completions at a higher yield. The benefit of our strategy shows up in the long term, income growth and total returns of the partnerships. Management revenue was up 28% or AUD 129 million over the year. The volume of stabilized third-party assets under management has grown by AUD 17.4 billion over the past two years to now stand at AUD 60.6 billion.
This has been driven by strong revaluation gains of AUD 8.2 billion in FY 2022 on top of the AUD 5.6 billion in FY 2021. The remaining increase came from net acquisitions and the completion of developments. The weighted average increase in stabilized third-party AUM was over 20%. As a result, ongoing management fees have increased by AUD 70 million.
Our base fees represented around 0.75% of that AUM. Performance and transactional revenues contributed AUD 208 million this year compared to AUD 149 million last year. Total management fee revenue as a percentage of average stabilized third-party AUM was 1.1% this year, broadly in line with last year. The timing of performance fee recognition may vary in any given year, depending on calculation dates and the degree of certainty ascribed.
Over the long term, we continue to believe that 0.9% of third-party stabilized AUM is a good estimate for our likely management fee revenues. With AUM likely to grow through development and there being a backlog of unrecognized performance fees, we continue to see scope for growth in the management services over time.
Development remains an important part of our strategy. We create significant value throughout the development and asset management process. It comes from the identification of assets and the construction of the portfolio, achieving planning outcomes, project delivery, and then effecting the leasing outcomes. We've continued to execute on these core functions very well despite the challenges the world is facing, so our margins have been sustained. Strong risk management, cost control, and rent increases in the markets we have chosen to operate in have supported the outcomes achieved.
Over the past few years, the increase in development volumes has been a significant driver of income growth. The estimated end value of work in progress has increased from AUD 6.5 billion two years ago to AUD 13.6 billion today. The development period for the projects has also increased from 17 months to 23 months. Our average annualized production rate has increased from AUD 5.7 billion in FY 2021 to nearly AUD 7 billion this year. As you would expect, our income has grown strongly. Realized development income was AUD 961 million compared to AUD 718 million for FY 2021, representing 34% growth.
Also wanna point out that in addition to the realized cash income, over AUD 650 million of development income was recognized as our share of revaluation gains that sit outside of operating profit. Of this, AUD 334 million has resulted from properties that are subject to conditional contracts for sale. With the AUD 96 million we had as at June 2021, it brings the cumulative tally to AUD 430 million, which we expect to close over the coming period. If and when those sales complete, we will reflect these gains in our measure of cash backed operating profit at that time. Customer and investor demand for development opportunities remains positive at this time. We intend to continue to pursue the development-led approach to investment, provided the opportunities remain appropriate.
This will drive growth in AUM and investment income and sustain income from the development business. We are aware of the risks in the market today, and should the environment turn, we can temporarily alter our strategy accordingly. Over the long term, however, the development-led approach has served us well and will ultimately be a long-term driver of our business. Growth in our operating expenses was 19% or AUD 55 million, which is in line with our previous guidance, and still moderate in comparison to the nearly AUD 0.5 billion increase in investment development and management earnings. Our employee base has grown to facilitate the growth in the business, and we have recognized the recent performance of the team and current labor market conditions.
We've had an increase in some of our compliance costs, some business travel has returned, IT expenses are up, and we've scaled up our charitable contributions again too. Our aim is to keep the fixed cost relatively steady and instead to use at-risk variable costs such as STI and LTI plans to incentivize and align our people. Our borrowing costs were higher due mainly to new debt rates.
Our tax expense was up given the growth in profitability. As far as the non-operating items are concerned, we had over AUD 2.3 billion of revaluation gains in the year, which represents the group share of the AUD 8.5 billion in gains across the entire portfolio of assets under management. cap rates compressed over the first half, but remained relatively stable in the second half.
On the other hand, rental rates accelerated over the second half, which became a very significant driver of those valuation gains. Development valuation gains also continued to contribute to the total valuation result, with AUD 1.7 billion of the AUD 8.5 billion recorded over the year. Around AUD 0.6 billion of this was the result of developments completed within the period, and the remainder was from gains emerging on investment properties under development to reflect their significant progress.
The outlook for cap rates is less certain now, but the rate of rental growth is accelerating. The interaction between the two, rents and cap rates will determine the outlook for valuations in the coming period. We believe that in the long run, the quality of our portfolio and its growth prospects will ultimately transcend any near-term volatility.
Another customary area of difference between operating and statutory profit is the fair value movement in the hedges, which were down AUD 191 million overall. Mark-to-market derivative gains or losses are reflected in the income statement because the group does not apply hedge accounting. These movements should be considered in the context of the AUD 144 million gain reflected directly in equity through the foreign currency translation reserve.
The FCTR gain represents the translation of the foreign denominated net assets for which the group holds derivatives to hedge against exchange rate movements. The net result of these movements is reflected in the statement of comprehensive income, but excluded from operating profit calculations. 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.
This is when they actually have an impact on security holders. The accounting cost of the LTIP has declined this year, mainly due to the decrease in the security price. A few remarks now regarding the balance sheet on slide 11. The FX impact on the balance sheet comparing June 2022 to June 2021 was not material. Despite the sales over the year, the wholly owned stabilized asset portfolio has increased in size.
This was mainly the result of nearly AUD 0.5 billion of assets being transferred in from development, around AUD 0.5 billion of acquisitions, and AUD 260 million of revaluation gains. Partially offsetting this was over AUD 820 million of disposals. Our share of the stabilized assets within our cornerstone investments in partnerships were up by AUD 3.2 billion over the year.
Around AUD 1.8 billion of this was the result of the valuations, and the remainder was due to net new investments and the completion of developments. Compared to June 2021, our development holdings are up by AUD 0.8 billion overall. We had a AUD 0.8 billion increase in our share of the partnerships development capital allocation.
The investments, expenditures, and revaluation gains from projects still in process exceeded the volume of assets completed. Noting again that some AUD 0.5 billion of inventory was classified as stabilized property post its completion. Our cash position increased by around AUD 130 million over the year. The cash generated from our retained earnings and the proceeds from our U.S. dollar bond issue funded the investments we've made, which is consistent with the design of our long-term capital management plans and the distribution policy. That's a good point.
Let's 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. In light of the continued growth and developments, we aim to maintain low financial leverage for the foreseeable future. In addition, we continue to invest in the business to generate strong returns and fund its growth sustainably. That's why our distribution per security is expected to remain at AUD 0.30 for FY 2023. We have a strong hedge profile, so our exposure to FX and interest rate movements is limited. That's all for me. Thanks, Greg.
Thanks, Nick. Now let's turn to the outlook on Slide 20. Goodman's agility, locational strategy, and strong balance sheet mean we're well positioned to continue to adapt to the ongoing market challenges. Remain focused on providing deep value and operational excellence for our customers and all our investors. We forecast to deliver a positive FY 2023 off the back of a very strong year. We have a significant development workbook underway, continued underlying structural demand from our customers, and a robust capital position across the group and the partnerships. As a result, we expect FY 2023 operating EPS growth to be 11%. Thank you. Now we'll take questions.
Thank you. We will now begin the question- and- answer session. If you'd like to ask a question, please press star then one one on your telephone keypad and wait for your name to be announced. Please stand by while we compile the Q&A roster. Our first question comes from Grant McCasker at UBS. Please go ahead.
Good morning, Greg and Nick, and thanks for the detailed remarks. Can we just touch on the development earnings for a second? Well, first of all, would you consider this a normal year? What I mean by that, it looks like throughout the year you've probably completed nearly AUD 1.5 billion of product on balance sheet, albeit you've sold it down, and you're highlighting sort of a large development profit coming through in FY 2023. Is this what we should expect going forward, that you do that level of development and completions on an annual run rate on the balance sheet?
Certainly, when you look at the demand around the world and the opportunity set, I think that's right. We're looking at a lot of, even currently a lot of large sites around the world, which are in the regeneration sites and regenerative nature. Some of those are actually taken, as you know, on balance sheet. We work through them, and then they're, once they're de-risked or they're planned or there may be infrastructure outcomes, they then go through. There's also activities around data centers as well with the same scenarios. Land, supply power could be two or three years in the making, and that tends to be what comes across the balance sheet into partnerships once we've had a significant de-risking event on the way through.
Yeah, so look, I think moving forward, development's gonna be robust. There is gonna be use of the balance sheet when appropriate. There is gonna be de-risking of certain sites that are more of a regeneration in nature, and effectively, that's something we've been embarking on over the last four or five years. I think over the next few years, that will accelerate. Nick, would you like to make a couple comments?
I think, Grant, look, I think that for the purpose of modeling and projections, I would say, yep, you can run with that. If that changes, and it can change over time in terms of the mix, I think is the nature of your question, in terms of where it's originated and where it completes, and our proportionate share of the income that results from where we, you know, at what point in time do we sell it down? As it changes, and if it changes, we'll keep you notified. I think, you know, for the purpose of financial projections, that's the best way to look at it.
Okay. Are you able to then maybe just give a bit of a guidance at AUD 1 billion of development earnings, what comes from sort of balance sheet development profits versus the co-promotes from the funds?
Yeah. No, we don't really give specific breakdowns on how that comes about. What I will say is, you'll sort of recall from previous calls and discussions that the fee component. The way our fees generally work is that we earn base kind of project management, development management fees, which typically around the sort of 5% mark. Then we get a percentage of the return over the benchmark. That benchmark in some cases is zero, in others it's up to 10%. We typically would get something like 20% of the overage as a result.
You can determine from, you know, yields on costs and where you think cap rates are, what kind of margins we're generating, and therefore the percentage mix of what's on balance sheet and what's in partnerships. I think you can derive some conclusions around that, but we don't give specific breakdowns.
Just one further one. Are you willing to just put a sort of an end AUM or third party AUM number out there for the end of FY 2023?
Look, it's pretty easy to do the calculation. It'll be through AUD 80 billion, and that's just with the run rate on development. What we're doing though, look at the partnerships and where they're sitting, average gearing 70.5%, AUD 18 billion of liquidity or opportunity for our investors. We've just taken a couple of those opportunities in the last actually two to three weeks on some bigger sites into the partnership. I think you'll find that primarily with the capital, with the demand and with the opportunity, we'll be growing the assets under management relatively strongly, subject to revaluations finish up and things of that nature over the next 12 months and currency as well.
Okay. Thank you very much, Greg and Nick. Thanks for your time.
Thanks, Grant.
Our next question comes from James Druce at CLSA. Please go ahead.
Yeah. Hi. Good morning, Greg and Nick. Just a question on the DPS. Are we getting close to a point where that is going to grow or you think the outlook for the next little while is gonna, you're gonna continue to retain more and more capital?
Sorry, James. Was that the DPS?
DPS.
Oh, DPS.
Yeah. Just looking at the AUD 0.30. Yeah, the AUD 0.30 guidance. You're retaining more and more capital each year to fund the development pipeline. Just wondering when you expect that to start to grow.
It's something that we're constantly reviewing and the board constantly reviews. Looking at the opportunity set that's out there, looking at where our cash needs are, and wanting to sustainably fund the business into the future, you know, we deem that at this point in time, it's appropriate that we continue to pay out AUD 0.30.
You know, that's something that we'll keep you posted in the future. I think, you know, we'll get to a point where we are generating enough free cash flow out of the retained earnings that we feel comfortable to increase at some point. Right now, you know, we're looking down the barrel of a lot of opportunity that's quite attractive. It's appropriate for us to maintain distribution where it is, for the short term.
Okay. That's clear. Just with your conversations with tenants, can you just talk about how their CapEx priorities have been changing over the last 12-18 months, just in relation to how they see, you know, the importance of automation or otherwise?
Yeah. Really good question, and that's part of the, I think the situation where we're seeing the opportunity that there is a very, very big focus on productivity out of buildings. I talk about it, I've been talking about it for the last number of years, but it's come to a point now where it's not optional. You must have a building that is operationally very, very efficient. It might be costing you more. It certainly is costing you more, but you need to get more out of it. The conversations with our customers around the world, going back to my earlier comments, were all about productivity, all about location. Location is really important in regards to drayage and costs of getting goods into and from the warehouse and where they're going.
That is way more important than it was, say, five, six years ago. If fundamentally those locational aspects are now starting to pay dividends for the customers, but also means there's a lot of demand in the locations Goodman is around the world. When we look globally, and this hasn't happened in my 30 years in this business. We do not have a warehouse available anywhere in the world in our portfolios. They're practically all full, 99%. The only buildings that are available are the ones we're building. We're building into primarily in our locations around the world into markets where there are no buildings available. I think, I've never seen it before. That is, I think, going to the nub of your question, which is around what are they doing?
What we're seeing is they are actually looking for new facilities in critical infrastructure style locations where productivity is the key. Yes, you'll pay an extra 10%-15% rent to get that productivity. That's certainly what we're seeing, and we don't see that slowing down in the current inflationary environment. If anything, the conversations with the customers are more urgent now than they probably were even a year or two ago.
Okay. One more if I may. Just how rent growth has changed over the past six months around the world just by market. If you can give some color there, please.
Yeah. Look, I mentioned my opening remarks in regard to mark-to-market. I think that's the way you wanna look at the valuations and the cash flow going forward. We sort of did a bit of a spread in the U.S., so that's about 40 under. I think some of the comments from some of the other big U.S. operators would probably attest to that. I think Europe about 18 under. You work through Asia, primarily, more subdued around four. Bearing in mind, Hong Kong would be sitting at about two to three. You've gotta take that into account that the Hong Kong, China has basically been shut for pretty much three years now.
We expect some more activity and growth in rents in those locations, probably as we go through an opening up process, which may be in the, let's hope in the next calendar year. Aussie, about 20%. New Zealand, similar sort of numbers on the market. Look, we are hopeful that over time, certainly over the next four or five years, those rents will come through in the cash flows, and that will support and grow valuations. When we look around the world as well, we're looking at a lot of our real estate, even at the valuations they sit today, is sitting, you know, under replacement cost.
I think, we're feeling fairly good about the cash flows and the growth in the cash flows and the rents, but it's all about delivering the service to the customer and making sure that, if the rents are moving, we're offering something to our customer that allows them to be more productive, so they can afford to pay more rent. We can't forget about where the money actually comes from, and that's primarily the customer and then ultimately the consumer.
James, the only thing I would add just that the rate of market rental growth in the last six months has been the highest on record. It's accelerated in the last six months, and the outlook in the next six months is equally strong.
Okay. That's very clear. Thank you for the color.
Thanks, James.
Our next question comes from Stuart McLean at Macquarie. Please go ahead.
Good morning, and thanks for your time. First question is kind of relating to the divvy being flat this year. What are you expecting the production to be next year? The reason I ask is it was AUD 7 billion in 2022. You're retaining more capital, I'm assuming that the production number starts to move higher.
Well, not necessarily significantly. It could do and that's a possibility, but it doesn't need to move significantly. I mean, the delta on the retained earnings, Stuart, isn't that great in the sense that, you know, you know, if we grow the divvy by 10%, for example, you know, that's the amount of capital in any one year.
Then if you break that back to what proportion of share of the development with or the production rate, that means from a funding point of view is, it's not that material. Where it becomes material is in the long term, the compounding effect of that over time. Plus, you know, once you've raised the divvy, you don't wanna be going backwards either, right?
We wanna do it at a time when, you know, the next level of distribution is gonna be, you know, the sustainable level going forward. I think, yes, the outlook for production rate, you know, the average this year was just under 7 billion. Right now, as we sit here today, we're just over 7 billion in terms of the spot position. You could infer that in the coming 12 months, the production rate will remain above 7 billion. There will be some growth, and that's what we've allowed for.
If it grows even a little bit more than that, it's not hugely sensitive and it's not like we're gonna go cut the divvy anytime soon to do that, to deal with that. In the long run, it's really about a sources and uses strategy that's sustainable and reliable that the you know the market can be comfortable with.
Okay. Thank you. Sticking on the outlook for development, commenced AUD 7.9 billion of development this year. Should we expect a similar type of number, going into FY 2023, given the demand that you just talked about before?
Yeah. Look, that's a reasonable guide. I think, you know, the production rate or the time in production months, you know, may come down a fraction. Even if we're not starting as much or the WIP balance itself, you know, can be a little bit, you know, can be say at these levels, but still have a higher production rate as well. Look, I think it's not a bad guide, but we certainly think that the production rate is gonna be, you know, sustainable at AUD 7 billion+ for the coming period.
Great. Thank you. And one other, just on the guidance, I think, Nick, you provide in regards to investment earnings being about 90 basis points of fee generating AUM. I was just looking back at prior calls. I think you're going closer to 1%. Is that just a rounding thing? Has anything changed to bring it from 1% down to closer to 90 basis points?
Well, I think the biggest difference has been that the cap rates have come down lower and a chunk of our base management fees are rental-based. You know, that doesn't actually move with rising property values. It's just the rental rate. That needs to be adjusted. If cap rates were 5%, then it's more likely it'll be closer to 1% because the rental proportion is higher. Does that make sense?
Yeah. Yeah. That's very clear. Thanks very much for your time.
Okay.
Our next question comes from Sholto Maconochie at Jefferies. Please go ahead.
Oh, hi. Just a few follow-ups. Thanks for your time. The performance fees were AUD 208 million this year. What's the level left going over the next five years? I think it was around AUD 1 billion on the last call. What's your assumption on performance fees going forward, next sort of five years retained?
Yeah. The estimate at the moment of backlog is 1.2.
Okay, 1.2%. Just on the WIP, it looks like from the third quarter, if you look at the margin, I'm just trying to dissect guidance, quite conservative. If you look at the yield on cost of 10 basis points, cap rate's stable, so margin at the gross level around 65%, which is still quite elevated. To kind of work out the guidance, did you assume in the guidance any of that, the AUD 430 million in the guidance, or is that on top of the 11% you've guided to?
No, that's part of it. That's part of it.
That's part of it. Is it all of it? It wouldn't because it doesn't seem like it'd be all of it, would it? Or assume all of that settles in FY 2023 onto the P&L?
Well, yes. We have assumed that it all settles in FY 2023. That's correct.
Okay. Just if you can talk to sort of the demand side of things. Have you seen obviously we saw Amazon earlier in the year, but it hasn't impacted what you said demand for customers. Is that was that just more a secondary market issue, and have you seen any softening in demand? Do you worry about a slowdown in the global economy impacting demand, or is it enough demand to offset that given supply chain efficiencies?
Yeah. I think it comes back to your last point, that everyone's still looking, everyone's looking at how they optimize their footprint, their infrastructure, probably with Amazon, probably with Amazon not doing quite as much, primarily in the U.S., it's still very busy in other parts of the world. That's given other people the opportunity to probably get into the market and do what they need to do. There's just a tremendous amount of long-term planning going on in regards to what an infrastructure should look like for a business, and how you get more productivity out of it. That comes with innovations, that comes with predictive technologies in regards to when and how and if they have products in their buildings.
I think the other thing you've had is the concern as well around a lot of businesses around the world that they actually don't have the goods on hand because of the supply chain problems and obviously the issues out of China and what have you. It's all manifesting itself and good locations are absolutely critical for these for our customers and those locations driving productivity. There's only so many buildings available. Overlay then environmental and planning issues. Everything, particularly in infill locations, and even greenfield locations is taking longer, planning is longer. There's more onus on the developers in regards to your carbon footprint, and that is taking way longer to get through planning.
You've got all these things manifesting themselves into you can only supply so many buildings in and around L.A. is the reality or in and around Sydney. There's only so many you can supply, but the demand currently globally outweighs that supply. Now, if we go to secondary markets where land is plentiful and easy, where we're not, that's a different equation. I think if you look at the prime markets, the prime infill markets around the world and the big cities of the world, you'll find they're constrained. Amount of land you can actually make available constrain the amount of buildings you can build. It's taking longer. It is harder because of the planning regimes, and it's a more scarce resource.
All that leads to what we've got at the moment, and I think that will remain the case certainly over the next few years. We're working with customers to try and find them solutions. But there's not many solutions. There's not 10 to choose from. Yeah, it's an environment which is tough. You've got to have really good people. You've got to have really good infrastructure. You've got to have really good know-how in regard to how to get through planning and build these things. Part of the cost Nick was talking about earlier around people has actually gone into production and production people and planning people because that's a pretty critical element and it's getting harder, which means barriers to entry are getting higher.
You overlay development, finance and other costs that are being imposed upon, say, your merchant developers, the people that try and get in and out quick and sell it to the market. You know, their costs are substantially higher and effectively, maybe they're not as competitive as they were because their financing of those projects is way harder. I think we're in a reasonable competitive environment. If you've got the right sites around the world in the big cities of the world right at the moment and moving forward, certainly over the next year or two, there is an undersupply.
Just on the width, because you said production a little over. If you take the 13.6 and divide it by the 23 months, you get about 7.1 rounded. I think Nick said the production meant the duration comes down. If you take one month off, you're close to the sort of 7.5. Do you see production increasing on an average basis throughout the year to around AUD 7.4 billion-AUD 7.5 billion this year, given that the mix going on?
Yeah, look, that's not what we're guiding to. What I just said was that it's 7.1 at the moment, as you rightly calculate, and that's correct the way you've done it. I think it's likely to be that or maybe a little bit more. Could it be 7.4, 7.5? Yes, that's possible, but that's not what we're guiding.
Okay. Just finally, on your like-for-like have been ticking up. Just below 4%. Given the re-renting, I'm not sure what the expiry profile looks like. How much like-for-like you assume in guidance this year, given that demand and re-renting across the portfolio?
Oh, it'd be ticking up over that number, but the under renting comes through over the next five to six years, primarily, all things being equal, which they may or may not. If the current under renting scenario remains, and I think you might get a little bit more of a kicker in places like Hong Kong and as they open up, that effectively you're gonna have pretty good like-for-like rental growth, as those come through and manifest their way through the cash flows.
All right. Thanks for your time. Thank you.
Thanks, Sholto Maconochie.
Our next question comes from Simon Chan at Morgan Stanley. Please go ahead.
Hi. Good morning, guys. I just want to ask you guys a question about 11% EPS growth guidance. What are some of the key assumptions underpinning that 11% growth? Can you, I guess, talk about, you know, your thoughts as to asset valuation growth, if you factored too much of that in, into your guidance as well?
Yes, Simon, I think probably the best way to think about what assumptions in the guidance is that, you know, market conditions remain relatively conducive to us. As Greg said, look, demand overall from an occupier point of view remains robust and investors continue to want to invest. I think everything outside of that, you know, there are a number of different ways we can bake the cake, and how we can get to the final answer. We've got a few options open to us and a few different strategies. You know, obviously, if there's plummeting valuations and that sort of thing, well, obviously that's gonna be a challenge to achieve. Outside of that, you know, we've got a number of different ways that we can meet the guidance.
It's not as mechanical and direct as you know kind of a coefficient for each variable. It's there are a number of different strategies that will get us there. Development, as you can see, you know remains robust. Because of the duration of the pipeline and how it unfolds in terms of the revenue, you know for the coming year, there's really good forward momentum. A lot of it's locked in. As you know, AUD 430 million of it is contracted conditionally. There's more coming through with the work in progress. Assets under management are growing, base fees are consistent. It's really just the remaining bits and how we get to the final answer.
We've got a number of different options open to us and avenues to get there. We feel that we've put a responsible number on the page. It is achievable. Taking into account what we see as being, you know, a relatively, you know, choppy market in some ways, but by the same token, great opportunity for us. That's the best way to look at it.
Sounds like a lot of moving parts. Hey, my next question is just on slide 33. If I take a look at your development yield for completed projects is 6.9%, WIP is 6.6%, and development yield on your commencements is 6.3%. That suggests to me that every new project you're kicking off is, you know, at a lower development yield than the one you were just finishing. What are some of the strategies you have in place to make sure that, I guess, development margins don't compress over time? Because certainly looking at these numbers, it looks like they could be compressing over time.
All right. Well, it's a bit of a relative game, isn't it? I think our development margins are very good and remain to be the case. I think you've got to look at geographies and that's something which creates a difference. You've then got to look at some projects we're doing at the moment are massive pre-commits, as well, like, hundreds and hundreds of millions of pre-commits, which obviously gives you a different risk profile that's pre-sold, those sorts of things. There's a lot goes into it. You can't just look at it arithmetically. The risk's got to go with it. If that book was all spec, yeah, you'd probably need sevens. It's not.
I think you need to look at it characterized by geography, by location, by customer, by type, by the location inside the city or outside the city. A lot of things go into it, but we're maintaining good, strong margins to risk. That's important. The book is strong, as you can see, and remain that way during the course of this year, with plenty of opportunity. A lot of things we're looking at the moment, quite frankly, are transactions that probably are four or five years out in regards of planning and infrastructure and things like that.
It's a bit like I said earlier, things are taking longer. The environmental aspects are way more challenging. The responsibilities around those aspects are way more challenging. It's making the barriers to entry higher, and it's making the amount of product in those key locations to customers, harder to supply. If you feed that in, that gives us a pretty good runway, we believe, over the next two or three years, all things being equal.
I think the other thing, Simon, is that the 6.9% on the completions, the estimate on those when we started them wouldn't have been 6.9%. Some of those outcomes that we've achieved have outperformed initial underwriting and guidance. We do typically have a little bit of conservatism in the initial sort of underwriting, if you like, and that's what the 6.3% is based on. As Greg said, take into account geography, take into account mix, but also, you know, we've got to be cautious in this environment around a few of the factors that go into that. We've put a conservative number out there. We'd hope to beat it.
That's terrific. Thanks, guys.
Thanks, Simon.
Our next question comes from Richard Jones from J.P. Morgan. Please go ahead.
Oh, hi, Nick and Greg. Just, I mean, historically, in the last three years, you guys have guided initially and kind of upgraded almost quarterly after that. I mean, if we sit here today and conditions remain relatively stable, do you expect that you're gonna comfortably make your 11? Is it kind of factoring in, I guess, further economic headwinds that you're putting in the 11% guide today?
Look, I think, Jones, with these things, you've got to look at the environment we're in at the moment. I think Nick talked about the volatility of markets. Yeah, we're factoring in the climate we're in at the moment. If that climate improves, we'll see how we go. At the moment, we're factoring in a market that is volatile. Not everything is gonna go perfectly. We're factoring that into putting responsible numbers to the market and one that we have confidence in. I think that's the best way to describe it.
Yeah, just for the record, Jones, we did upgrade quarterly last financial year, but that's not the case in every year. Just for the record, that's not something people should programmatically expect.
Okay. Thanks. That's it from me. Cheers.
Thank you. Sounds like you're cooked, Jones. Get some rest.
Our next question comes from Suraj Nebhani from Citi. Please go ahead. Sorry, my apologies. It looks like the line has dropped. We'll take the next question. The next question is from Louise Sundberg at Bank of America. Please go ahead.
Morning, guys. Just following up on the question on the yield on costs on the committed WIP. 6.3% obviously still attractive versus CapEx. Very attractive. You know, if we look forward, land costs are up, construction costs are up. As you say, projects are getting more complex. What is sort of the development margin where development no longer looks as attractive for you, where, you know, you may wanna pull back with?
Yeah, look, if you're taking a risk on development, you wanna be making money. Right? Now, I don't know whether everyone sees it that way. I think there's competitors in the market that actually seem to build to get product because you can't really buy good product. But look, we have a very disciplined approach. We wanna build in appropriate risk and the return on capital.
Most of our development, 70-odd%, 80% of it's done with our partners, and they're very disciplined around the world as well and they require a sensible economic return to taking the risk on development. If people don't believe there's any risk in development, they should go back to school, to be quite honest. Yeah, we're disciplined, we're careful. It depends on what I said earlier.
The geography depends on whether you're getting a 20-year lease pre-commitment on a building that might have a return on the total cost. You know, we take risk out of it because the customer's taking the risk on the cost of the building and all those sorts of things as well. It depends on how you construct them. If you're looking at, you know, good 30% margins on good prime projects around the world, I think you're in pretty good territory. Some of that number too, where it's a little lower, there's a couple of projects actually kicked off, I think in Japan, which would be at the lower end of the yield on cost sort of regime. It is very much location-based, and the fair bit of that is also pre-committed.
Thank you. Just on the mark-to-market on the rents, are the new rents you're signing at the mark-to-market or are they, sort of, at market rents? Or are you giving discounts because there's pre-commitments on development and big customers like Amazon? I mean, should we assume that the incremental rents are done at these market rents or at a lower sort of increment?
No, you're quite right. That it's the higher number. It's a market. If we're doing a deal today with a customer on a pre-committed basis or on a spec basis, the sort of the guide we've given you would be hitting those rents.
Great. Thank you.
Look, that comes down to the demand supply I was talking about before. Equation.
I guess just one final question on acquisitions. You know, the outlook is for cap rates to rise. I guess, you know, if you listen to the U.S., U.S. parties and so on. Are you still finding attractive acquisitions or do you have to look harder?
Look, I think, to be quite honest, I think this climate over the next year or two where things are getting harder. We'll see at Goodman. I think we've got the people, the expertise, the patience. We've got the capital, we've got the structure, we've got the partners. We see the next two or three years as being opportunity for us to get some things that maybe were a little competitive two or three, even six or nine months ago. We are seeing right at the moment, particularly development, bigger land opportunities, a little bit more technically difficult, things like that, suit us. We're looking forward to an environment that's maybe a little tougher, to be honest. If it's too easy, you know, everyone can do it. I think that's changed.
I think interest rates have changed that. I think the dynamics around the environmental conditions, planning conditions have changed that. I think the cost inflation of buildings and the technical expertise you need to get these things up and down and not disappoint a customer and make sure you make money along the way. I think the capital providers are gonna be a lot more selective than they probably have been in the last 12 months. I think capital is gonna be. I believe it will go to the best names in the industry, whatever sector that is in, but I don't think it'll go to everyone. I think we're in a climate that when Goodman looks forward, we can see a little less competitive environment probably.
We're seeing that on a couple of deals we're doing at the moment. We see opportunity. Now we need to flex and exercise those opportunities very carefully, very patiently. We need to build in the appropriate amount of margin for risk. Anything we do will be super prime. It'll be really strategic, it'll be very long-term, it will be technically difficult, and it won't be everyone's bag. That's the stuff we're focusing on.
Thanks so much. That's all for me.
Louise. Thanks, Louise. Operator, we've just gone over the hour. If we can just ask couple of final questions and anyone who's coming on, please, if you could limit the number of questions just to enable everyone to get through, please.
Certainly. We'll take our next question from Alex Prineas from Morningstar. Please go ahead.
Good morning. Thanks for the presentation. Just wondering in terms of the geographic mix of the portfolio, can you comment on whether the sort of future opportunities broadly reflect where the portfolio is largely invested now? Or are there, if there are differences, can you comment on, you know, what countries you may or may not be investing more in or perhaps investing less in?
Yeah. Look, a good question. I think if you look at the construct of the portfolio at the moment, Australia is still, you know, a very, very big portion of the portfolio and will continue to be so. When you look at, say, the U.S. in particular, and Europe as well, I think you'll find that the portfolio and the capital allocation will keep growing and, particularly the U.S., big market, biggest market in the world. We've got a good team finding good opportunities in and around the coastal markets. I think look for U.S. to grow in absolute terms, and the projects tend to be getting bigger. More complex, a bit like I was talking about earlier. I think U.K. running into continent from Europe as well. Bigger projects, more complex.
We've, I think, only about five to six months ago, spent probably, what? Close to AUD 300 million just on one site just out of Paris, which is, you know, two to three times what we've been doing three to four years ago. I think in Europe you'll find those projects are getting larger, more complex, more infill locations.
Asia, I think will just be broadly consistent, as well, where we tend to have a lower ratio of ownership at Goodman Group level. Australia will grow as a function of our development book, which is over AUD 2 billion-2.5 billion in Australia at the moment, and is undersupply buildings. Effectively, it's gonna grow everywhere, but look to the U.S. and probably Europe as being couple of the stronger in absolute portfolio size over the next probably five years.
Thank you.
Thanks, Alex.
Our final question will come from Ben Brayshaw at Barrenjoey. Please go ahead.
Thanks, Greg, for the presentation. I'll just keep this brief. Perhaps it's a question to Nick. I was wondering if you could discuss the approach to profit recognition on the development revaluation gains that sit outside of operating profit. I'd just be interested as to, I suppose, whether the trigger is, you know, settlement or whether, you know, you're prepared to take a risk-weighted approach in some cases.
Yeah. We're required to. To derecognize the asset, you need to have formed the view that the balance of risk and return has passed to the purchaser. That will trigger from an accounting point of view, the derecognition of the asset in the statutory. That will then drive the outcome from when we trigger it as operating profit. However, we've already determined that, you know, the trigger's gonna be settlement in these particular cases. In this situation, settlement will be the trigger.
Okay. Thanks, Nick.
Thanks, Ben.
Thank you, everyone. That was our final question. I'll hand back to Greg for closing comments.
Thank you, everyone, and have a good day.
Thank you. This does conclude our call today. Thank you all for joining. You may now disconnect.