Ladies and gentlemen, thank you for standing by and welcome to the Goodman Group FY 2020 Full Year Results Conference Call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Greg Goodman, Chief Executive Officer of Goodman Group. Thank you, sir. Please go ahead.
Thank you very much. Good morning, and welcome everyone to Goodman Group's results for FY 2020. I hope you are feeling safe and well. I have Nick Vrondas with me on the call. It's certainly been an extraordinary year with the global pandemic continuing to have a profound impact on the world. Through this time, we've remained focused on executing long-term strategy, leveraging the structural trends, some of them which have been accelerated by COVID-19. We've adapted quickly and efficiently, and I thank our people around the world for their flexibility, hard work, and resilience. It's meant that our business has faced limited disruption and been in a position to realize opportunities to grow further. In FY 2020, the group's operating earnings remained ahead of guidance. Operating profit was AUD 1.06 billion, up 12.5% on FY 2019.
Operating earnings per security AUD 0.575, up 11.4% on the previous year. Statutory profit coming in at AUD 1.5 billion. Goodman is well capitalized with available liquidity of AUD 2.8 billion, including AUD 1.8 billion in cash. This is in addition to the AUD 16.3 billion available within our partnerships around the world. Gearing for the group finished the year at 7.5%. The events of the last year have resulted in fundamental shifts in how we live, work, and consume. This includes an acceleration of e-commerce, a shift to remote working, and a significant increase in demand for technology and big data. The location and quality of our assets means that Goodman is well-positioned to leverage the opportunities in this new operating environment.
Continuing strong customer demand has seen development work in progress increase 59% on the last year to AUD 6.5 billion and will exceed AUD 7 billion in the first half of this year. This increased development activity is flowing through to our Assets Under Management which broke through AUD 50 billion, an increase of 12%, while our partnerships delivered returns of 16.6% with strong income and capital growth. Now turning onto slide seven. Our earnings from investments are up 14% to AUD 425 million. This is as a result of high occupancy at 97.5%, strong like-for-like rental growth of 3%, development completions, acquisitions, and increased investments in our partnerships. Development work in progress is clearly strong with solid margins and pre-leasing activity. The average lease term is now the longest it's been at 15.1 years.
We expect this trend for longer leases to continue as customers choose high-value infill locations and invest more in the technology in their facilities. External Assets Under Management have grown due to development completions of AUD 2.4 billion, valuation gains of AUD 2.9 billion across the Group and partnerships. As a consequence, management earnings are also up 9% to AUD 511 million and are enhanced by the positive performance of the partnerships. In this changing global landscape, we're accelerating our progress on the 2030 sustainability strategy we announced last year. We've increased our commitments, contributions, and targets significantly, including moving from 100 to 400 MW of solar capacity installed on our rooftops around the world by 2025.
In the wake of the Australian bushfires and the global pandemic, in FY 2020, we increased both our financial and non-financial support through the Goodman Foundation to AUD 13.7 million to make a tangible difference in our communities. I'll now hand over to Nick just to run you through some more detail. Thanks, Nick.
Yeah. Thanks, Greg. Let's turn to slide 10, please. Okay, we'll first cover the operating profit items, and then we'll discuss the non-operating items listed at the bottom of the table. Given the Australian dollar finished the year broadly in line with where it started, the effect on our balance sheet and derivative mark-to-market was minimal. In terms of our income, though, the dollar was on average lower over the course of the year, but we hedged FX movements. The translation effect was positive on our revenue items, which are broken down into AUD 10 million on investments, AUD 18 million on management, and AUD 20 million on development. At the same time, it resulted in an AUD 8 million increase in our operating expenses and AUD 5 million on tax.
The net effect of these was offset in our borrowing costs, which were AUD 35 million higher than our 2% weighted average cost of debt implies. In other words, our borrowing costs will be much lower if the exchange rate remains unchanged or continues to improve. This will offset any decline in the Australian dollar translation of our foreign-denominated revenues net of expenses. We can now discuss the movements in the operating results on a constant currency basis. Starting with property investment earnings. The direct property net rental income was up AUD 4 million. This was mainly driven by underlying rent growth as the impact of asset sales was offset by the income from completed developments. The sale of the remaining U.K. assets from the balance sheet will result in a decline in NPI in FY 2021, absent further investment.
It's worth noting that we believe that the Australian assets have significant long-term value growth potential. This may come in the form of redevelopment to more intense or higher and better uses. In the short term, performance is not necessarily the best indicator of long-term value or of market conditions. Sometimes, for example, these assets are made intentionally vacant to facilitate their redevelopment. In such instances, like-for-like NPI growth is constrained in the short term, but the long-term benefits are far more significant. These have not been prevalent in FY 2020, but it's worth highlighting it, as it may occur from time to time. The more significant part of our investment segment comes from our cornerstone interest in our partnerships. Here, income grew AUD 39 million compared to the same period last year. AUD 12 million of this was driven by like-for-like NPI growth.
The increase in the capital allocated to our cornerstone investments has also contributed, accounting for AUD 27 million of the increase. In aggregate, the partnerships have been net investors over the past 24 months. They sold AUD 1.3 billion worth of assets in the year and AUD 2.8 billion cumulatively over the past 24 months. More than offsetting this were the investments they made. These were principally into developments intended for long-term ownership, which totaled AUD 3.3 billion in the year and AUD 7.7 billion cumulatively over the past 24 months. A result, the group contributed its share of equity, which amounted to AUD 300 million of new investment into our partnerships in the year.
This was on top of the AUD 800 million we invested last year. The average yield on this new equity was a little over 4%, which reflects the increase in the cost base due to the revaluation gains w ith most of the incremental equity investment made by the partnerships going into developments and taking into account the expected sales and other available funding sources, the growth in this line item is expected to be moderate and driven mainly by rent increases in the coming year. Even though we expect to continue to refine our portfolios over time, the overall investment should grow in the coming years as the substantial increase in the development activity we're currently expecting will ultimately result in an increase in stabilized assets in the partnerships generating our share of the rents.
Management revenue grew by AUD 23 million. Performance fees contribute AUD 207 million this year, which is broadly in line with FY 2019. The underlying growth in AUM, however, resulted in an AUD 29 million increase in revenue. As we stated previously, we expect that the fee revenue on our Assets Under Management should average around 1% over time. Given the strong performance of our partnerships, there's scope for a continuation of performance fees. The strong growth in development activity, which will more than offset the effect of the anticipated asset sales, means that growth in AUM should also continue. Overall, management revenue should be stable in the coming year, with slightly lower performance fees but higher base fees.
Development income is up AUD 47 million compared to the prior corresponding period. This came mainly through the growth in development volume. The average work in progress has increased materially over the year, so despite the longer time in production due to the higher intensity nature of the projects, our revenues have increased due to the higher annualized rate of production. A number of projects that were scheduled to complete in the June quarter will complete in the September quarter, but despite this, WIP will grow to over AUD 7 billion in the near term. The returns we're generating from our developments are consistent with long-term targets and appropriate for their complexity and duration.
In addition, an increasing number of our development activities relate to land-rich transactions, such as land leases granted to customers or land sales. In these situations, the returns generated are higher than average relative to the cost base, but the absolute dollars are consistent with what we should expect. The work in progress as at June 30, 2020, has an average expected duration of about 17 months, so the revenue from these projects will flow through FY 2021 and FY 2022. We continue to be encouraged by demand levels and our capacity to meet our customers' needs, so we expect to increase our production rate again this year. This means the development income in FY 2021 is likely to be materially higher.
Turning now to expenses with respect to overheads, they were up AUD 16 million compared to last year. Nearly AUD 10 million of this increase has come from compliance costs and charitable donations. Overall inflation was relatively low at 3%. Our aim here is to continue to keep our fixed costs relatively steady and to use variable costs to incentivize and align our people. The Incentive Award Program remains highly skewed to equity, which underpins the alignment between employees and security holders. With a strong focus on the existing markets and opportunities, we can remain concentrated in our efforts. This should enable us to continue to generate income growth without significant cost escalation.
On a constant currency basis, our net borrowing costs were AUD 10 million lower this year. The reduction in capitalized interest and interest earned on cash deposits was offset by the impact of the reduction in our debt costs. During the year, we repaid higher cost debt, and we had a lower floating rate of interest on the unhedged portion of our liabilities. Our net weighted average cost of debt is currently a little under 2%, and it could fall further in the coming year. As a result, we expect borrowing costs to decline substantially in FY 2021. Our tax expense was down a little this year. As previously flagged, the nature and location of the transaction will have an impact on tax expenses. Again, this needs to be considered alongside our development revenues.
Looking at the types and locations of the development transactions and the origin of the management earnings in the coming year, we expect the recent trends to continue. As far as the non-operating items are concerned, we had over AUD 620 million of revaluation gains in the year. This represents the group share of the AUD 2.9 billion in gains across the entire portfolio of Assets Under Management. In light of the caution in the market at the moment, cap rate compression over this year was less than that in the prior year, as valuers took pause to assess things in the second half. Rental increases have continued to drive appraisals, albeit that valuer expectations of growth have been moderated slightly in light of the lower inflationary expectations in the economy overall. Whether this turns out to be the case remains to be seen.
Revaluation of development assets contributed nearly a third of the overall gains, which helps drive performance of the partnerships and increases the Group's NTA. Given the current strength of demand for our assets, we believe that positive valuation growth can continue in the near term. As usual, we also exclude the accounting cost of the employee long-term incentive plan, but we include the tested units in the denominator when calculating our operating earnings per security. The decline in the accounting expense was primarily driven by the movements in the stock price and the introduction of more onerous performance hurdles. A few remarks now regarding the balance sheet on slide 11. The increase in wholly owned investment properties since June 2019 was driven by nearly AUD 50 million of revaluation gains. Investment expenditure, which was largely offset by divestments.
In the absence of new acquisitions, we expect the balance of stabilized assets to decline as we shed the remaining U.K. assets in FY 2021. Our cornerstone investment in partnerships, other than those with a primary focus on development, were up by around AUD 900 million. Nearly AUD 600 million of this movement came through the revaluation gains and retained earnings. The remainder relates to the equity funding of around AUD 300 million. This volume of investment was a little lower than the usual expected run rate, as the capacity generated from previous asset sales is used to partially fund the growth. We are moving towards the restoration in the average level of partnership gearing to be in the desired range of around 25%. We expect our long-term capital allocation to partnerships to grow as we fund our share of the growing volume of developments that we complete to hold.
In the coming year, we expect this to be funded by a variety of sources. These include additional capital derived from some asset sales, partners' equity, the 80% payout ratio of these entities, and further utilization of their existing cash and debt capacity. The group will fund its share of the partners' equity through the retention of profits, consistent with the expected distribution of AUD 0.30 per security for FY 2021, which represents a little under 50% payout ratio based on the guidance we released today. In FY 2020, development cash flows have been relatively balanced. As a result, our development holdings have been relatively flat compared to June 2019. In the second half of the year in particular, we saw a reduction in working capital allocated to pre-sold projects from the group balance sheet after a buildup in the first half.
As we've said before, this can vary depending on where we are in the point of the development activity program relative to the settlement process for new projects versus the older ones. Given the strong pipeline of activity, we expect a growing working capital allocation to development in the coming year. The group continues to operate at the lower end of its target range for gearing and expects to continue to be able to facilitate the growth and development whilst remaining in that range. Net debt was AUD 200 million lower compared to the same time last year. Breaking that down, our cash position has increased by around AUD 180 million since June 2019. This came after the repayment of nearly AUD 50 million of liabilities.
As outlined earlier, we also used around AUD 300 million of cash to invest in our partnerships and developments m ore than offsetting this, we had the benefit of our retained earnings. For FY 2021, the repayment of U.S. $175 million of bonds will result in a pro forma reduction in cash and interest-bearing liabilities. With the increased development activity and commensurate investment in the partnerships, we also expect that a portion of our cash balance will be used in the coming year. Offsetting the impact of that, we see our payout ratio resulting in nearly AUD 600 million of funds being generated to help finance our activities.
That's a good point to turn to slide 12, which highlights the capital position. As we have said before, we will operate our gearing within a range of 0%-25%, with the level to be set with reference to the mix of earnings. We aim to maintain low leverage for the foreseeable future. In keeping with this, we've continued to review our distribution expectations relative to the upcoming capital needs. Given our desire to increase development activity and the consequential increase in our expected equity contribution to our partnerships, we've updated the target payout ratio in order to maintain a sustainable long-term funding structure. This strategy will help us continue to deliver competitive rates of EPS growth while maintaining appropriate gearing levels. That's all from me. Thanks, Greg.
Thank you, Nick. Turning to slide 21 and finally the outlook. Goodman has deliberately positioned its business over the past 10 years to maximize sustainability of earnings in varying market conditions. We expect COVID-19 to continue to significantly impact the way we live, work in the foreseeable future. The pandemic has reinforced the consumer need for convenience and heightened the use of technology, which have accelerated the adoption of e-commerce and increased the need for data storage globally. Notwithstanding the challenges of the pandemic, we're well-positioned to take advantage of the acceleration of these trends. Customer demand for all well-located industrial properties is translating into more development activity, high occupancy rental growth, higher Assets Under Management, and ultimately strong returns across our property investment and management businesses. Our business resilience, combined with these global macro trends, is leading to a strong performance.
As a result, the group expects to deliver FY 2021 operating profit of AUD 1.165 billion, up 10% on FY 2020, and operating EPS of AUD 0.627, up 9% on the FY2020 year. Forecast distributions for FY 2021 will remain at AUD 0.30 per security. Well, thank you very much. Nick and I are now open to questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question today, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request at any time, please press the pound or hash key. Your first question today comes from the line of Darren Leung from Macquarie. Please go ahead.
Good morning, team, and good result. Three questions from me. One was just on the performance fees. Just wanted to clarify your comments, Nick, around performance fees coming down. I'll assume that's FY 2021 down versus FY 2020. How does those numbers work when you've got a higher AUM base and performance is better than your mid-teens comment previously?
Yeah. Do you want to ask all your three questions or do you want to go one at a time?
Let's just go one at a time.
Okay. Yeah, look, it really is just a little bit idiosyncratic in terms of the timing of when some of the measurement dates occur rather than performance related, and it's just the way that they fall on the timeline, not a performance-driven number. We're not talking material changes here.
If it's timing related, should we expect a bigger performance fee in FY 2022, then?
2022 is a long way away, Darren. We'll talk to you about that maybe later in the year.
Okay. When you provide your guidance, what are you assuming in terms of your performance at the fund level, and then what's the hurdle that you have there?
All those numbers haven't really changed, Darren. As previously, the hurdle rates, if anything, some of them come down a little bit with bond rates coming down as a benchmark. Really no change there. The underlying performance doesn't need to be as high as it was this year to continue to generate performance fees. We've got a backlog of performance fees that will come through as well.
Yeah. There's a lot of embedded performance as well over five, six, seven years, some of these things are calculated. It's a pretty smooth trajectory as we look over the next year or two.
Sure. Well, that's a good outcome. Can you give us a rough indication as to how much performance fees you have backlog that's not recognized?
We prefer not to because, that could mislead people. No. Sorry.
Okay. Fine. The other one was just around the dividend. I think we've previously talked about the payout ratio being in the low 50s. You're pretty much there. What's the risk that we drop below the 50% mark and I suppose to sustain the business model, how do you think about further capital allocations with the funds or are you happy to let that lose a little bit?
I think Nick said before in his address that the payout ratio will be just slightly under 50. I think it'll be 48% for this year. We are under 50 anyway. Look, there's still rotation of assets around the partnerships, that's pretty clear. There's a major transaction obviously in Europe we settled just recently, which reorganizes their capital stack for the next year or two in regard to Europe. Effectively, Goodman still has assets on balance sheet that are able to rotate as well, and some that are coming more into maturity stage or a time when we might rotate a few of those into different circumstances and things like that. Look, we've got plenty of opportunity to generate cash to meet the growing work-in-progress book, which I think is probably what you're alluding to.
Certainly over the next two or three years, that's very much in our plan to rotate capital and to have a payout ratio that's accommodative.
Okay. Just a final one from me. Any thoughts around capital allocation into Hong Kong and China? We've talked about them being longer duration projects previously, but as those projects complete, would you look to recycle that capital back into those geographies? Given the view into the medium term, where do you think about deploying that capital?
Look, I think the capital deployment in Asia is going to be pretty steady over the next 12 months to 18 months.
Sure.
We're not going to allocate a lot more, but it's probably going to remain steady.
When those projects complete, would you look to divest? I assume it's not incremental new capital, but is there, I suppose, a strategy to step out of those markets?
Step out of those, out of China, Hong Kong, and Japan? No.
Darren, those assets are already in partnership. I'm not sure if you're aware of that, but they're already funded in the partnerships. The Hong Kong ones.
Yep.
Yeah. Mainly China as well. Yeah.
Yes. No, I understand. Okay. Thanks guys.
Thanks Darren.
Your next question comes from the line of Sholto Maconochie from Jefferies. Please go ahead.
Hi. Some of them have been answered, but just on the distribution, I think you're saying circa 50% payouts of 48. It seems it's retaining about AUD 605 million, AUD 606 million to fund developments. Is that the main reason to have it flat again this year because you've got that massive increase in WIP to keep gearing sort of constant?
You're sharp this morning. Yes. That's exactly right.
That's spot on, Sholto. Thank you.
Okay. Finally get one. Then just on the WIP, obviously big increase year on year. I couldn't find the slide. Normally, you put like the WIP by region, a breakdown. Do you not put that in anymore?
No. I'm looking at James here, who's in the room. No, that hasn't been included this time, but I don't think it's changed materially, or if anything, Asia is a little bit stronger. It's a good contributor. The percentages are in there.
Okay. Usually you'd like to divide the AUD value across completion, starts and everything. Do you have that WIP? What was the big driver? Where were the sort of? Obviously, you've got some Hong Kong stuff in that NPI. Where was the big driver from that increase in WIP?
Look, it's been really solid all around, really good performance on field all around the world. I think Australia, obviously there's been a couple of big projects announced here. I think a month ago or so, around e-commerce.
Okay.
Hong Kong, including some data storage facility in Hong Kong. Hong Kong is pretty strong. China though is growing. I think you'll see in 2022 that'll be a strong book than when we're sitting here at the moment. That's growing very well. Japan's consistently good. Asia's good. Going through the U.S., we've got some lumpier projects coming into the back end of this year, and also into 2022. The U.K. is getting into stride at the moment. We've gone through the book. Over the last few years, we've got rid of what we didn't want, and that's now primarily gone, and we're really into some good stuff in around the M25 and up the M1. I think you'll find that'll be a bigger portion as well.
Europe's really consistent and with the sale program we've been through in GEP, in Europe, there's just a bigger emphasis around the major markets of Germany and France and down in Spain and the Benelux. I think you'll find there's some really good high-value stuff coming through there. When you look at our workbook moving forward, I think today we said we're going to go through AUD 7 billion running into December. We'll go through AUD 7 billion strongly. Right. That'll be a contribution from the geographies around the world. It's not one particular thing or project, it's just a lot of very good projects.
Just on the WIP, you've got going to AUD 7 billion. Seems like they're longer dated, more complex, so sort of 18 months for those projects on the pipeline. Based on your guidance, you're saying that obviously development seems to be the big driver, management's sort of flat to up, and NPI is just more in line with rental growth. Obviously, the competition's moving around a lot. What's the biggest driver of the growth this year? Is it just mainly that development WIP coming through to AUM and the NPI line? Some like-for-like in there?
I think in the short term, it's the development volume that's going to be the biggest driver. In the years following, as those developments complete, the other line items will grow.
Yeah, I think that the point there is we're going to keep a lot of the development projects we've got coming through. It'd be a 90% keep.
Y eah, in our partnerships and what have you. It's really good long-term lease stuff and stuff that our partners want to own for the next 20 years, primarily. From that point of view, a lot of keepers. You'll see Assets Under Management drive pretty close to AUD 60 billion this year, and with a little bit of valuation help, probably will go through AUD 60 or be around AUD 60 billion. Assets Under Management are going to grow pretty strongly, which then gives you a nice effect running into obviously 2022, which we're very focused on right at the moment, 2022 and 2023.
Just on that, on the AUM, you had a currency benefit at the quarter, the updates. I think you went from AUD 46.2 at the FY 2019 to AUD 49.2, then AUD 55.1.
Yeah.
The AUM's come down. Is that just currency because the currency was a lot stronger?
Yeah
in the last quarter?
Yeah.
At the end date? Okay.
Yeah.
Okay. That's offset that benefit in the quarterly update, okay. That's it for me. Thanks very much.
Thanks, Sholto.
Your next question comes from the line of Simon Chan from Morgan Stanley. Please go ahead.
Hey, guys. Just a couple of quick ones this morning. Can you talk about how much divestments you've probably baked into your guidance for this year? I mean, you've sold AUD 20 billion in the last seven years. What have you baked in this year?
Look, it'd be around a couple of billion, probably. There's normally anywhere between 2% and 5% where we're working through our book.
Great.
A couple bill
Okay. That's clear. Hey, I was just wondering if you guys could perhaps elaborate on the reason for the increase in WIP. In answering Sholto's question, you mentioned geography. I was just wondering if you could perhaps split it up for us in terms of the key industries. What percentage, data centers, e-commerce, how much of it is manufacturing or equipment assembly? What's really driving this AUD 7 billion?
Yeah, look, a lot driving it is the work we've done over the last five, seven years in asset selection. Right? This is a product of the work we've done five, six years ago, reorganizing, redeploying, selling secondary sites and secondary locations. Bringing everyone back into the core, bringing everyone back into the urban growth environments. That's what's driving it. Effectively, the macro trend around e-commerce is strong, and it was strong going into COVID-19, and it's got stronger through COVID-19, effectively. Then I think as something that parlays off that as well is obviously technology and data, and data's growing. Now, we've been doing data centers for 10, 12 years, so this is nothing new for us, just that that sector is getting more voracious in expansion.
You see that through some of the very large operators, and that's who we're dealing with, the very large operators of the world. The reality is they all go to the same industrial site that might require for warehousing, data center, and some residential. We've got these competing uses converging on some of the sites we own and bought and property we own around the world. You've got this convergence, and that is happening in all markets we're operating in. There's real competition for the really good sites, and I think that's what is driving, ultimately, the work in progress. I think you'll find that we say it goes through AUD 7 billion, and it will go through AUD 7 billion strongly.
I think we can comfortably say, Greg, there's not a lot of manufacturing assembly in there.
No.
Yeah.
No.
Would you suggest that the AUD 7 billion is pretty much, say, 10% data center and the rest the Amazon-like e-commerce stuff that's signed up, do you guys?
Yeah. That's a pretty good shot. You've had a pretty good shot at it, yep. That's about right.
Okay. I might stop there and go on the hiding. Thanks, guys.
Yeah. Thanks, Simon.
Your next question comes from the line of James Druce from CLSA. Please go ahead.
Hi, good morning, guys. Another question on the development pipeline. Thinking about the completions over the next 12 months, can you give some color around the sort of quantum of that? Knowing that you've sort of done AUD 4 bill FY 2019, down to around AUD two and a half. WIP's obviously gone up hugely.
Yeah.
Just sort of the run rate for completions and the relationship with WIP going forward?
Like I said, I think we called this out a little while ago where as we're moving to these higher intensity projects, longer duration projects, there will be this transitional period, which we're going through now. The kind of completions rate is not the best indicator in the short term, which is what you're alluding to at the moment. The best way to look at things is more on the production rate, that's why we emphasize that this time around. Historically, when projects were averaging 12 months, it was in and out, the WIP was a good indicator of production rate at around sort of AUD 3 billion-AUD 3.5 billion. What we're seeing now is that production rate is going to go beyond AUD 4 billion, and head towards AUD 5 billion if things continue at this pace. That's the better indicator.
The completions rate, on a WIP balance of AUD 7 billion, for example, on around 18 months, the production rate will be around that sort of AUD 4 billion mark. I think that's where we get to in 2 years from now in terms of the completions rate. Then we'll see where it goes from there. Does that make sense? You understand the dynamics there?
Yeah. That's really helpful. Thank you. Just on some of the thematics, you called out e-commerce, remote working, and big data. The other sort of thematic that's been going around a little bit is the sort of near-shoring, on-shoring, regionalization of supply chains. Maybe it's a bit more U.S.-centric, can you just comment on that trend as well?
Yeah. No, you did right. I think all businesses are looking at how they have a sustainable in-country supply chain, particularly in big countries where there's a lot of population and a lot of consumers. The U.S. is a very, very good example. China's actually another really good example as well, with 1.3 billion people. That's occurring. We're doing a lot of work with grocery, basics and staples and things like that as well, making sure we get the improvements around efficiencies and costs and speed, and speed to market and all those things. Yeah, you're quite right. We have a body of work when we look out over the next couple of years, which is pretty extensive and expansive around all those things. I think the prognosis for certainly 2022 is also looking pretty good around the development book.
Okay. That's it. Thank you.
Thanks.
Your next question comes from the line of Grant McCasker from UBS. Please go ahead.
Good morning, Greg and Nick. Just one question from me that the 6.8% yield on commencement for AUD 4.5 billion is very attractive. You've moved out of sort of the broad acre development and into more infill locations where you say there's less competition. What is the appetite or how much competition are you seeing in that part of the market? That's the first part of the question. The second part, when we look at the development book going forward, what proportion will come from your existing portfolio versus actually having to buy sites?
Look, I think around the competition element, Grant, look, good sites are always competitive. There may not be, right at the moment, 10 people turning up for a good site, but there's four or five, and the four or five that have got capability, intent, and capital. I think you'll find that good development sites, and we're talking the ones that are AUD 70 million-AUD 150 million, which is basically the range we work in the main, some a little bigger. You'll find that there's good demand, because I think the bigger players in this industry understand the dynamic and the drive that's coming through from the customer. People are turning up. Competition's still there, but that's nothing new to us. A couple of sites we bought just recently around the world, a few hundred million AUD we've done off-market, that's great.
Another couple we're doing off-market, that's also good. We're just in the market all the time, looking at where we want to position ourselves, and it's incremental. Coming down to your second question around buying, we don't have a Friday where we say we've got to go shopping. We have a look constantly. That's our job 24 hours a day, primarily around the world because it's a 24-hour business. That's what people are looking for, that site that's got something a little bit special. Maybe we can power it up so it works for a data center, or maybe it's got some additional old buildings which we can reconvert to something else. Or maybe there's a site in five years' time, 10 years' time, could be an urban renewal play. Those things are incremental, and they've got to be in the DNA of the business.
That's certainly the way we've positioned the business over the last 5-7 years in particular, to have that foresight and drive to make sure that it's incremental. We don't end up in the scenario that if we pop out AUD 7 billion- AUD 8 billion of work in progress, we're running around scrambling around sites where we don't have to. In the current 50-odd billion AUD portfolio, yeah, there's a lot of property in that as the cycle continues that come into that sphere. For example, a land value down in South Sydney to build a multistory, which we're planning a few down in South Sydney. A few years ago, you might have been looking at making it work at AUD 1,500 a meter. Now you can probably make it work at AUD 2,000 a meter because we're the REIT and we're the demanders.
Some of those sites we had down in South Sydney now are going, wow, we can bring that forward a little because of the demand factors. I think longer term. You are what you eat in this business. If you got really good real estate and good locations, I think you'll find that the regeneration, particularly around industrial, when the stuff on top of the ground is less expensive to build effectively from a shopping center or something, or an office building, effectively, you can regenerate. We have a lot of that around the world, and we've been particularly buying that type of product in the U.S. We're buying it at the end of its life cycle, might have another year or two to go, then we can wind it into something better and bigger and more robust that suits the market today.
That's the stuff that we really, really like, and that gets us up in the morning with a spring in our step if we can find stuff like that.
Okay. Just please then bring that back to the development yield of 6.8%. Do you think you can maintain that in FY 2021 for the commencement?
Yeah.
Okay.
Yeah. Grant, just to be clear, the AUD 7 billion projection, that's all stuff that is in the ownership now.
Sure. Yeah, I get that.
Yeah.
Okay.
Okay. Thanks, Grant.
Thank you.
The next question comes from the line of Richard Jones from JP Morgan. Please go ahead.
Hi, Greg, Nick. Just further to James' question from earlier, can you just run through, if I look at completions are down circa 40%, earnings for development up 13%. I know you're talking about production being more important, but I would imagine the bulk of the profit in development is recognized on completion, given that's when you're testing the return versus hurdle. Can you just work us through how that works, Nick, and I guess with visibility, you're saying that the production rate north of AUD 4 billion, what does that number look like relative to 2020?
Rich, if you go back, maybe this year's not the best year. If you go back, say, to FY 2019 and before that, you might recall we did a lot of this. We explained it all back then and how it worked, and the mix of earnings and the composition of earnings based on the 80/20 ratio of on-balance sheet to in partnerships, and then our fee portion relative to the profits we make on the asset sales blended out to a revenue return in the low teens. That is still consistent, right? There's some timing issues. You're right. For example, development performance fees will get calculated upon completion, but that means that projects that completed at the end of last financial year, FY 2019, would have revenue coming into this year as well.
That's why we're going through this period where the completions number isn't really the best indicator. It's really that run rate number that's going to be the best indicator for you. If you think about AUD 4 billion type run rate number of work completed, and if you think about that low teens revenue take, that will help instruct you as to what composition of earnings will look like and how it will be derived in the coming year. I think that's a better indicator for going forward.
Okay. Is the mix on versus off balance sheet likely to be different in 2021 versus 2020?
Not materially. I don't think so.
Yeah. There's a couple of bigger projects.
Okay
a couple of bigger projects, Rich, on balance sheet that'll work off. I think in July, we actually had a pretty strong completions in July as well. It didn't fall in June, fell into July. I think Nick's right. It's going to be a pretty big number going forward of production, and I think there's plenty of opportunity there for the group to do well out of it.
Okay. Expect a strong development number in the first half for earnings again. Is that?
Yeah. I think.
Yeah
a fair assessment. I think we've put out AUD 1.165 billion number, which is 9% on top of 11.4%. Yeah, it's going to be a strong result.
Yeah.
Absolutely.
Yeah.
Okay. Thanks, guys.
Thanks, Rich.
The next question comes from the line of Suraj Nebhani from Citigroup. Please go ahead.
Thank you. Morning, gents. Just on the AUM number, wanted to clarify, Greg, didn't you say it would be AUD 60 billion by the end of the year?
Look, I said we'll probably go pretty close depending on valuations. Yeah.
Okay. That would assume what, AUD 4 billion of completions coming through and maybe some acquisitions as well, right?
Yeah. There'll be completions coming through. Hopefully, there'll be some valuation growth. The indications at the moment are industrial cap rates are probably firming from what we've seen around the world. I think that'll probably be a bit of a feature for the year. Look, it's uncertain times, so you've got to look at cap rate compression and things like that with a degree of uncertainty. At the moment anyway, it looks like certainly the wall of capital wanting to get in industrial is actually pretty voracious, pretty large. Yeah, I think cap rates are firm. I think they are at the moment actually. I think with some of the transactions that have been going on around the world. I think you put all that together, yeah, it'll be a pretty strong growth in AUM.
Sure. Just trying to add that up with the comments that Nick was making earlier about values holding cap rates steady post-COVID. Do you see that changing over the next 6-12 months then?
Yeah, look, I think, if I had to call it now, I'd say it's come in 25 basis points, probably over the last four weeks, to be quite honest. Yeah, no, I think cap rates are We're getting some unsolicited bids even in the U.K. on assets that got a three in front of it now. Yeah, I think industrial, if things remain the way they are, and that's uncertain because we don't know, that's the reality, cap rates are probably going to tighten, would be the call I'd make right at the moment. That call next week could be very different depending on the way the world goes.
Sure. That makes sense. Just on the development again, are the large Australian projects that were signed with Amazon over the last few months, are they included in WIP now or not yet?
Some of it is, yes.
Yeah. Okay, can you just say how much development, like how much product can the land that you have across the portfolio, how much product can you build based on that before you have to go out and restock?
Look, it's multiples of what we're doing at the moment. With what we own around the world. A lot of what we own that you might call as an older style building on a block of land is actually, as the demand builds, those actually come forward. They don't go back. The land value passes through basically the land and building value. Yeah, there's more coming into production because of the demand and where the rents are going. Look, we're well catered for. Like I said, incrementally, I think it would be in the last week, we've bought about AUD 140 million, two sites, in this part of the world. There's another probably AUD 200 million we've just bought probably about three weeks ago in Europe, in the U.K. specifically.
I think from that point of view, it is incremental and this is something we do just all the time. It's not something, like I said, it's a Super Friday and we go out and buy some stuff because we need some. We look for it all the time, and it's the sort of thing that I think makes our business really interesting, looking at a site and looking at the possibilities and what could it be and how can we work it and what planning can we get, and can we upgrade it on an FSR basis? Can we go multi? Things like that. I was looking at one with Anthony Rozic the other day, in the U.S., the first multi we're looking at. I don't think we're necessarily going to do that one, but we're looking at it all the time.
Yeah. Fair enough. Just finally on the guidance. Just trying to add up the comments that you're making on the various segments and the cost of debt, obviously you expect it to fall as well back. As I think Nick was saying, that it would be pretty similar trends for this year. I'm just wondering what's weighing down on a FY 2021 guidance?
Look, I think 9% is a pretty good view and a pretty good number. Obviously we're in very uncertain times. We've got an element of prudence in that number. We're not trying to be overly conservative or overly optimistic. We're trying to be realistic. Some things will go our way, some things mightn't. We made sure we put a number out there we feel confident in. I think it's the best way to describe it.
Yep. Fair enough. Thanks for that.
Thank you.
Just a reminder, ladies and gentlemen, if you do wish to ask a question today, please press star one. Thank you.
I think we're all good. Thanks a lot, everybody. Like I said earlier, stay safe and take care.
Thanks, operator.
Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect.