Thank you for standing by, welcome to the Goodman Group Fiscal Year 2023 full year results. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one one on your telephone. To remove yourself from the queue, simply press star one one again. As a reminder, today's program is being recorded. Now I'd like to introduce your host for today's program, Mr. Greg Goodman, CEO. Please go ahead, sir.
Yeah, thank you very much, and good morning, everyone, and welcome. I have Nick Vrondas with me on the call here this morning. I'd like to begin by acknowledging the traditional owners of the 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 delivered strong results for FY 2023, with an operating profit of nearly AUD 1.8 billion, up 17% on last year. Operating earnings per security, AUD 0.943, up 16% on the same time last year. The quality, location of our sites are underpinning rental growth, property values, and development activity. Despite the economic uncertainty, the structural forces in our markets remain intact. They continue to be driven by the need for more productivity, the growth of AI, and the digital economy.
Against this backdrop, there remains limited supply in our markets around the world. Our strategy is also providing value-add opportunities as we see increased competition for industrial sites from other users, such as data centers, and even potential for rezoning, primarily in the Australian market, to residential. We've been developing data centers since 2010, and over that time, we've grown to become a meaningful part of our business in line with the rise of the digital economy. Approximately 30% of our AUD 13 billion development work in progress is currently in data centers. Importantly, we have a potential pipeline of over 3 GW of power, which will create significant value over time.
Also, with the lack of available housing in Australia, the next phase in the cycle of urban renewal is ticking up, particularly in the new build-to-rent space, providing us with opportunities for rezoning parts of our portfolio to residential. Pressure on limited industrial land supply in our markets is therefore increasing and is supporting underlying property fundamentals for our existing assets and our development program, where completions were 99% leased. Goodman's development earnings were up strongly, 35% on FY 2022, increasing to $1.3 billion. Our execution has been consistent, and we've continued to manage the rising cost environment. Yield on cost on work in progress remains at 6.6%. Also, assets under management have grown 11% to $81 billion, driven primarily by $6.9 billion in development completions. In addition to acquisitions and revaluations across the group and our partnerships.
Partnerships delivered a total return of 7.3% and expanded the investment management platform with the establishment of four new partnerships and AUD 1 billion in new capital commitments. We continue to experience high occupancy of 99% across our stabilized portfolio. While like-for-like net property income growth was 4.7%, reversion to market also remains significant. This will and should support growth in cash flows over the next few years, as well as our valuations. Guided by our 2030 sustainable strategy, we continue to integrate ESG into our business. Our focus throughout FY 2023 remained on incorporating sustainable design features into our developments and reducing carbon emissions in line with our targets, validated by the Science Based Targets initiative. Highlights include reaching 75% of our 2025 solar PV target and contributing AUD 10.8 million to community causes out of The Goodman Foundation.
We continue our disciplined approach to capital and have maintained a strong balance sheet. The group's gearing remains low at 8.3%, while having AUD 3.1 billion available liquidity. The partnerships have an additional AUD 17.6 billion of capacity, which provides financial flexibility for the future. I'll now hand over to Nick to take us through some more detail.
Thanks, Greg. Let's turn to slide 10 and talk at the income statement. As usual, we'll cover the items that relate to our cash-backed measure of earnings, which we've consistently called operating profit. We'll discuss the items at the bottom of the table. Operating profit excludes the unrealized fair market value gains on properties, the hedge mark-to-market movements, and the accounting fair value estimate relating to our employee long-term incentive plan. FX movements only had a minor impact on the translation of our foreign income when compared to the prior period, we can just talk about the operational drivers of the results. Looking specifically now at the movement in investment earnings. Direct property net rental income was down compared to last year. This was due to the net divestments over the past 24 months.
After taking these into account, as well as the transfers to and from developments, but excluding the valuation gains, we had a net reduction in assets of AUD 0.5 billion this year. We've also conditionally contracted to divest some properties that have been previously stabilized and generated rental income. Furthermore, we're expecting some of the existing assets to go into development in the coming years, which will reduce their rental income contribution as we prepare them for the redevelopment and during their development phase. The bulk of our investment income, however, comes through our co-investments in partnerships. Over time, we intend to continue to grow this part of the business as we expand our portfolio of assets under management and our investment in it. We also expect growth in rental levels to add to our income. Compared to last year, Cornerstone investment income increased by AUD 53 million.
Like-for-like rent growth accounted for AUD 24 million of the increase, and the net impact of capital movements contributed the remainder. Over the last two years, we've been a net investor of over AUD 2 billion into the partnerships, AUD 0.9 billion of which occurred in the past 12 months. The investments we've made alongside our partners have been toward development activities ranging from land, income-producing property with future development potential, CapEx on existing sites, and acquisitions of completed assets from the group. The relatively low initial yield on their acquisitions is being offset by development completions at a higher yield and rent growth. This balanced strategy in the partnerships is designed to achieve superior returns for ourselves and our partners over the long term.
With these ongoing investment and development activities, we expect to continue to contribute equity into partnerships, which will result in further growth in our investment income. Management revenue was down AUD 108 million over FY 2022, and that's because we've recognized no performance fees in the second half. In light of market conditions, we've taken a more cautious approach to recognition of performance fees, resulting in no accrual for those that are scheduled to be calculated in the coming period. This has the effect of pushing the revenue assessment back to line up with the calculation date and our invoicing. On the other hand, ongoing management fees increased by AUD 58 million or 15% over the, over the year-over-year, because total stabilized AUM in the partnerships has grown to AUD 68.8 billion.
That's AUD 8 billion higher than June 2022, and AUD 21 billion higher than June 2021. Revaluation gains, net acquisitions, and the completion of developments have all contributed to this growth. Therefore, total revenue as a percentage of average stabilized AUM was around 0.8% for the year, and we continue to expect it to average 0.9% over time. Development remains an important part of our business strategy. We create significant value throughout the development asset management processes. We've continued to execute on these core functions very well, despite the challenges the world is facing, so our margins have been sustained. This has been supported by our risk management and cost controls. These strong outcomes have also been the result of rental increases, driven by the quality of our locations and assets.
Over the past few years, growth in development volume has been a significant driver of this segment. Our average annualized production rate has progressively increased from around AUD 5 billion in the first half of FY 2021 to around AUD 7 billion this year. Due to the variety of methods in which we contract developments, our earnings are a function of the interaction between margin, volume, timing, and the proportion originated on balance sheet and within the partnerships. Realized development income was AUD 1.3 billion this year, compared to AUD 960 million in FY 2022. In addition to the realized cash income, over AUD 500 million of development uplifts were recognized as valuation gains. That's our share of the revaluation gains that have accrued to our partnerships as a result of the work they undertake.
Given the increased portion of development activity initiated on the group balance sheet this period, the mix of income that was realized compared to the unrealized gain, has changed. The outcome over the coming periods will be dependent on the opportunity set that we commercialize. We continue to have a wide range of options. A significant portion of these are currently on the group's balance sheet. As a reminder, we note the gains on sales of assets that have been subject to prior fair value movements as a result of repositioning activities. These arise given the long-dated nature of the developments and the need to reflect their fair value of our assets, where we have begun activity but have not completed the sales. We do not reflect these gains in operating profit until the transaction's complete.
In the financial statements, you'll see fair value gains that are higher than that reflected in the operating result reconciliation in the attached appendices. This is the result of the attribution of prior period fair value gains to operating profit in this period, now that the settlements have occurred. That those profits aren't double counted and can be reconciled over time, we notionally offset them against the current period valuation gains. There have been AUD 512 million of such gains reflected in the operating profit in fiscal '23, and notionally deducted from the valuation results. The current balance of contracted items is over AUD 270 million, which is the net result of the completed transactions and new additions to the list.
We remain enthusiastic about the prospects for our development business, which bodes well for both future revenue in this segment, as well as growth in AUM. Growth in our operating expenses has been moderate as our business continues to focus on a narrow set of markets, which enable us to grow revenues without significant cost variations. Our aim here is to continue to keep our fixed costs relatively steady and instead use at-risk variable costs, such as STI and LTI plans, to incentivize and align our people. Our net borrowing costs were down AUD 26 million compared to FY 2022. Capitalized interest was up AUD 18 million compared to the prior period, given the higher average balance of development assets over the period, at a slightly higher weighted average cost of debt. We've also had a significant increase in the interest earned on our cash and derivatives.
This more than offset the impact of FX hedging, the increase in our net debt, and the rising interest rates on the relatively small floating rate exposure we have. Our net WACD is currently around 3% and is substantially hedged against interest rate movements, given the high volume of fixed rate debt and hedges we hold. As far as the non-operating items are concerned, we had $0.8 billion of revaluation gains in the year, which represents the group share of the gains across the entire portfolio of assets under management. From this, we deducted the $0.5 billion of now realized prior gains to get to a $0.3 billion net result.
Cap rate expansion over this year was 0.5%. In aggregate, this was more than offset by the impact of rental increases and development completions within the partnerships. Development valuation gains were AUD 0.5 billion this year. Another customary area of difference between operating profit and statutory profit is the fair market value movement of hedges, which were down by more than AUD 200 million. Mark-to-market derivative gains or losses are reflected in the income statement because the group does not apply hedge accounting. These movements, however, should be considered in the context of the AUD 360 million gain reflected directly in equity through the foreign currency translation reserve, which is the currency impact on translation of our net foreign-denominated assets.
As usual, we also exclude the non-cash accounting cost of the employee LTIP, but we include the tested units in the denominator when calculating our operating EPS, because this is when they actually have an impact on security holders. A few remarks now regarding the balance sheet on slide 11. The FX impact on our balance sheet when comparing June 2023 to June 2022, was not material, as is evident by the relatively small FCTR movement. Due to the sales over the year exceeding the valuation gains, the direct stabilized asset portfolio has decreased by AUD 0.3 billion since June 2022. Our share of the stabilized assets within our partnership investments, on the other hand, were up by AUD 2.4 billion over the year. This was mainly due to new investment in the completion of developments.
Compared to June 2022, our development holdings are up by $0.1 billion, with the additions and expenditures offsetting the completions and sales. You'll note, though, that the mix of direct developments and those in the partnerships has changed. The balance of directly owned developments has increased by $0.6 billion, while sale share of the partnerships has declined by $0.5 billion. The statutory operating cash flow was up by nearly $500 million this year. Our operating cash flow statement shows $1.3 billion this year, which is net of the $0.6 billion invested back into inventory assets on the group balance sheet. We expect this inventory investment to generate profit in the coming years.
The sale of development properties, which are required to be included in the investing cash flow for statutory reporting purposes, also generated $0.6 billion. We did, however, spend $0.4 billion over the year. Timing of partnership distributions, cash received last year for fees that have been recognized in the income statement this year, along with other working capital items and their classification between financing and operating cash flow, accounted for over $0.1 billion of differences between operating cash flow and operating profit Our net investment in partnerships was $0.9 billion this year, which is $0.3 billion lower than last year. The cash generated from our retained earnings funds most of the investments, which is consistent with the design of our long-term capital management plans and the distribution policy.
As a result, our net debt position increased by AUD 0.3 billion over the year on a constant currency basis. The ratio of asset growth to changes in net debt meant that gearing was down marginally over the year. It's a good point to turn to slide 12. As we said before, we'll operate our gearing within a range of 0 to 25%, with a level to be set with reference to the mix of earnings and activity levels. In light of the activity and developments, we aim to maintain financial leverage in the lower half of the band in the near term. In addition, we continue to invest in the business to generate strong returns and fund our growth sustainably. Our access to financial resources places us in a very strong position in the market at this point in time. That's all for me.
Thanks, Greg.
Thanks, Nick. We now turn to the outlook. Goodman is positioned well for FY 2024. Competition for land from a wide range of uses is constraining the availability of space in our markets and creating new opportunities for Goodman. These opportunities include intensification to create multi-level industrial, data center development, where we have secured or identified greater than 3 GW of potential power within our existing portfolio, and the next phase of the urban renewal cycle, where we potentially have significant opportunities to realize value within our Australian portfolio. We expect to see further opportunities to add value through acquisition and redevelopment, and have continued to maintain a strong balance sheet, which, combined with retained income, provides significant liquidity, stability, and financial resources to enable this. Our capital partners are prudent, but continue to support the Goodman Investment Partnership platform.
We believe Goodman can continue to deliver growth despite the risks associated with the current market volatility. We expect FY 2024 operating EPS growth to be 9%. I thank you. We will now take questions.
Certainly. One moment for our first question. Our first question comes from the line of Simon Chan from Morgan Stanley. Your question, please.
Hi, good morning, Greg and Nick. Hey, guys, just want to talk to you a bit about performance fee. I guess a couple of questions here. One, you know, does the, does the change in the performance fee recognition imply anything about your view as to, you know, how fund performance is, how it impacts, you know, the previous $1.2 billion number you've thrown out there in relation to latent but unbooked performance fee? I guess the second part of my question: I noticed that the fund performance this year was 7% or so. If that continues, does that impact the performance fee outlook?
Yeah, look, I'll handle the last one, then Nick can go through the recognition. 7.5% is a really good return for the year, and it's certainly not negative. It's at least at par, and the long-term performance accumulation across the partnerships is still intact. Nick, why don't you go through the recognition?
Yeah, yeah. Simon, the- I think the way to look at it is, push it all back 6-12 months. The, the, the backlog of unrecognized performance fees is currently at AUD 1.3 billion. That's not been affected. It's really just a more prudent view. I mean, you needed to form a view on the certainty of recognition, and we think it's appropriate right now to take a more conservative view on that, because, you know, you need to, you need to be virtually certain. We thought it was appropriate to step it back to line up with the calculation dates.
Yeah, Nick, because I remember 6 months ago, you, you, you talked on this same conference call about how second half performance fee was probably going to be about AUD 100 million after AUD 42 million in the first half. This change in methodology has nothing to do with that AUD 100 million now being AUD 50 million or, or anything like that. Is that, would that be-
No. No, it's just timing. Exactly. Exactly.
Okay, great. Just my, my second question. Hey, guys, if I just take a step back and be really, really simple about things, development margins, have they gone up, or are they coming down?
Yeah, good question. Projects that we're agreeing today and doing are going up, and the returns we're looking for, because cost of capital has changed, are going up, which shouldn't be a surprise. We're being very, very focused on just the very, very best locations. I think you'll see in the presentation, I think it's the first time we've talked about the data center and the total pipeline, which is around that, in excess of 3 GW of power. Now, that's a lot.... Right, to be clear, tens of billions of dollars of development that we've also got embedded in the business of what we own. We've spent the last five to seven years on the infrastructure, the planning, and the power, and I think we've been talking about it over the years.
We're getting to a point as well, that this is now becoming material and significant. As we put in the presentation, it's 30% of the work in progress and could be higher in future periods. Look, we've got many drivers of development, which are helping maintain good margins. Anything we're originating or looking at new today, we're making sure that we maintain those margins or in fact, increase them.
Is it fair to assume that this, 6.6% yield on cost you disclosed today, probably has more upside potential rather than downside risk?
Yeah, we, when we're looking at projects today, unless they're north of 7, we're probably not playing, to be clear.
That's very clear. That's all I've got this morning. Thanks, guys.
Thank you. One moment for our next question. Our next question comes from the line of Sholto Maconochie from Jefferies. Your question, please.
Yeah. Hi, Greg and team. Thanks for the presentation and the good result. Just on the data centers is now 30% of the WIP, and how much of this is the farm? Is there any update on the data center farm that I understand you guys are looking at?
Yeah, look, the data center, the amount of gigawatts we've got is, quite frankly, the size of a data center company. Think of Goodman with a data center company inside of it, and a large one, is the way you want to start to think about it. Data centers, can be real estate, and they can be infrastructure, as you, you guys know, and we're in the process where we're developing some real estate currently. Future periods and future years, we might be actually developing infrastructure. That is because our customers, primarily the hyperscalers or the big end of town, is pushing us further and further down the track in regards to how much they want us to deliver.
We're in this scenario, and this very happy scenario, where we've got real estate, that is work in progress, but that may move into, over time, infrastructure, as well, which is going to give us a, a, like I said, a data center business inside Goodman, you know, effectively.
I think that's just clear. Yeah. Then just on, full fee's been touched on, is there any slowdown in demand from other traditional users of space? I know you've got very good locations, but have you seen a slowdown in leasing from your consumer-facing businesses at all in the last quarter or 6 months?
Yeah, good question. I think everyone's been hands in pockets the last six months. I think European summer, US summer's pretty slow, to be, to be fair. The conversations that we're having with our customers is all about productivity and location. We've got a number of big customers, some of the biggest we've got, that are all working with us on getting more productivity out of new locations. We've said this for a while. We've, we've created a business that's not a commodity. We don't have commodity real estate. We don't believe in it, and we don't think it delivers the long-term value and the growth and the cash flows that we require to drive our business.
Effectively, what we're focused on is assets that are special, assets where land is constrained, but where we can help customers drive productivity into some of the biggest consumer markets in the world, like New York, like L.A., like Sydney, like Tokyo, like London. When you go and you look at it top-down, there is over around the world, in general, you'll find there's a slowdown on, on, on activity from customers. There's also the handbrake going on, as I've described, commodity development in most locations. Big sheds, basically in secondary locations. Why are you going to build them? No one is going to occupy them. Rents will come down, cap rates are going up.
If you look at then assets, for example, in South Sydney, where we're hitting now $500 a meter, and there's not enough buildings to supply the demand, very different story. Look at the micro locations, look at the big cities of the world, and then take a line in the sand in regard to what Goodman is doing and where we own it. It's a very different story if you own commodity. We do not own commodity real estate.
Okay, then just finally, You put 0.9, almost AUD 1 billion into the partnerships this year. What do you expect to put into it in 2024?
All right. Look, look, it's fair to say we don't actually have a great requirement for capital in the partnerships. What that capital was actually, was a number of actually new partnerships, and I think you would have seen there was about 4 created during the period. Some of that was actually for data center, over a series of 4 buildings and, and raised the capital for the entire program over the next year or so. A little bit of that was a new partnership created in Australia for one of our big, big partners around the world. Once again, pretty bespoke. I think you might find a bit more of that from Goodman as we actually tailor programs for particular partners that require particular returns.
One thing I will say, though, that when you now have a mark on a, on a valuation of 5% in a good, good location, let's assume you get 3% or 4% growth. That total return on a levered basis is around the 8% or 9% mark. That's very attractive. If you can demonstrate, you can keep the cash flow, and you can keep the cash flow flowing for 10 years. I think we're coming into a cycle where Goodman will be, there'll be more money going into actually core. That's why I think Nick talked to you a bit earlier about we'll be originating a little bit more development as well. Development has been used by a lot of partners as a top-up when total returns on core were 6%.
Total returns on core in the Goodman world is between 8 and 9, and that's attractive globally, and we're working with a lot of big customers on and partners on particular programs tailored to what they want, and that's hitting the mark at the moment.
Great. Thanks, thanks very much, Greg, and for a great result now, look, thank you.
Thank you. One moment for our next question. Our next question comes from the line of Grant McCasker from UBS. Your question, please.
Good morning, Greg and Nick. You know, the business continually evolves. You've highlighted something really interesting here, because historically, I think Goodman been a developer of powered shells, essentially, and you're now saying you're going down the path of a data center operator. Can I just sort of clarify, you know, the level of investment you will be doing in the infrastructure going forward and what it means for the broader group? Is that balance sheet, or will you do that alongside capital partners?
Yeah. No, look, good question. I think we've given you a sense, the size and scale of it, with the power and the work we've been doing. We're not saying we're going down the track of infrastructure, which is effectively the business, around operating the data center. We're not saying that at this point in time, but that is an option that is on the table. As we are being asked by the big users of space around the world, and they are the hyperscalers globally, how can we complete their program and give them more efficient, program of building, completions, technology and know-how? As we go further down that track, and we're building and have built the expertise to be able to do that, it is a consideration. It is not a reality at this point in time.
I think it's just to make that very clear. If we did go down that track, it would be called infrastructure, and there's plenty of examples. You could talk to your people internally at UBS about infrastructure and what's required, and I think you'd get a line in the sand on it. In regard to who owns it and who's got it, it's across the board, but Goodman, with balance sheet and 50/50% ownership, would be half of it. A lot of it is controlled directly. Then there's other programs inside partnerships, and if it was infrastructure, those partnerships probably would not be participating in that activity. Think of it in that way.
It's a journey, not a, not the end of the journey. We are being asked by the big hyperscalers in the world to complete the program, because what's proved we're one of the most efficient in building these end-to-end, and effectively, the planning and the demand, as you would know, has gone vertical, driven by AI and the need for programs in 2027, 2028, and 2029. We're even talking to hyperscalers about deliveries in 2030 right now, such as the demand for space today. Importantly, over the next 6 or 7 years, to meet their aspirations with the product that they're producing, and where they determine the demand is gonna be.
3, 3 gigawatts, which will be closer to 4, probably in the next 12 months, is significant, and it's actually a bigger platform than a lot of the data center operators, are operating today or even have in their pipelines. It's significant.
Just following up on it, can I get some guidance of that 3? Yeah, we're now talking 4 of what's in partnerships versus the balance sheet.
The balance sheet would be 50/50. 50/50 partnerships and balance sheet would be very close to 50% of it.
Okay. The second point, so more on development on balance sheet means less development profits for the funds. How then should we think of that more medium and longer term performance fees? Because obviously, development profits ultimately came through on performance fees over a medium and longer term perspective. Secondly, what does that mean for some of the sort of existing funds that may not get as much development product? Do you need to sort of evolve or restructure funds with existing capital partners?
Look, I think over time. Good question again, Grant, you're right on it today. Effectively, partnerships will be restructured over time. Things will change. Participants, participants will change. It's a bit like I said earlier, we've got some AUD multi-billion dollar programs going at the moment, which are really bespoke to certain partners that are really big, and they want to have a 50/50 relationship with Goodman or a 70/30, and they want a particularly a sort of product. What we've seen in the last 6 months in particular, Grant, is that there's a real desire to go: "Well, look, if we're now buying at 5, 5.5 in a good location, and we have good growth, and we can get an 8 and a 9, you know, that's great.
The way they will look at development as well as development is maybe leasing an empty building. Effectively, where development- when Goodman looks at development, it's actually land planning, years, hard work, planning, more planning, and infrastructure, is the way we look at development. A lot of our partners look at it as, "Wow, if I've got a building and I can get a bit of the upside by taking the risk on the leasing part of it," is clear. We'll be doing more of the and we have been over the years anyway, more of the origination on balance sheet, which is that three years before you get a product out of the ground. That timeframe, Grant, is getting longer. The infrastructure is getting harder, and in certain markets around the world, we're years behind.
The market is years behind where the demand needs to be to meet the supply. Western Sydney, a really good example, that there's not enough space in Western Sydney. Infrastructure and programs are years behind, and customers basically have nowhere to go. We do that piece, there's a lot of development that may be described in the partnerships, which is really a little bit more simple. Standing a building up and then leasing it, which can get an additional kick in the return, it's not taking that three years up front.
Okay. Excellent. Thanks, Greg.
Thank you. One moment for our next question. Our next question comes from the line of Lou Pirenc from Jarden. Your question, please.
Yes, good morning, Greg and Nick. Just following up on your last comments there, Greg, about, you know, changing demands from your funds partners. You've been very disciplined in the last, you know, decade of selling assets when you feel that they're kind of, you know, there's not much growth left. How should we see that in this changing environment going forward?
Yeah, well, look, good question. I, I think today is not the day you want to be selling, anyway. There will be no change in the way we operate around rotation of capital, getting the best returns, and driving performance. We've seen... I think we're starting to see unfold around the world, in our sector and other sectors, what asset collection models look like. High levered asset collection models looks good when cost of capital was very low. Doesn't look so good today, and I think, big, big trap, and we're seeing those, in a number of those things, unwind. Look, the discipline's there. We're not gonna change the approach. We're looking for deep value. We're looking for stuff that is gonna promote, performance, our performance.
Obviously, we do well in regard to performance fees, but we're not gonna collect things to, to drive assets under management. What we wanna do is drive quality, and we wanna make our partners and all our stakeholders, we wanna make them money. That's what we're employed to do.
I think, I think, Lou, just to add to that, and I think what you might be sort of trying to flush out is, do we see more opportunity on the buy side and sort of turn sort of more net, net acquisitions?
Yeah.
I think it's fair to say that, the, the parameters that Greg described earlier, if we're able to find quality real estate that exhibits those kind of return parameters, there's a market there for that, that we think, makes sense. Yes, that opportunity could, could emerge.
Great. Thank you. Can I ask, last or three or six months ago, you kind of briefly walked through each of your markets and just talk about, you know, leasing, leasing spreads or maybe kind of where you feel your rents are compared to market? Can you give an update there? Has that changed much or any markets that you're concerned about?
No, it hasn't changed actually much. I think in the presentation, U.S. is still being L.A., New Jersey, to be clear, we're under market 66%. Australia's in the 40%. Most of that's Sydney. Sydney's over 50, and the rest, the rest of Brisbane and Melbourne's, you know, probably late teens, early 20, but Sydney is massive. Hong Kong is only starting to recover with the China pandemic, but we are starting to see 5-6% increases, so it's moving. Japan's a low-growth market anyway, that hasn't changed. Europe's about that 17-18% mark. London is a little higher, but I'm talking about London, not too far north of London.
Probably get to, the Midlands, not too much north of that, where there's a lot of, believe it or not, developers still building spec sheds. That would put pressure on rents, but around London, they're very, very tight. I've got to say as well, around London, there are sites. We've got 3 big sites in London that we're all powering up at the moment. In fact, they probably won't go industrial, they'll go data center, you know, over time. In our markets, that we operate in, there's actually sites that are coming out of the market that are not gonna be used as industrial, they'll be used for something else.
Great. Thank you.
Thank you. One moment for our next question. Our next question comes from the line of James Druce from CLSA. Your question, please?
Hey, good morning, Greg. Good morning, Nick. A bit of a bread-and-butter question for you. Just looking at the passive rebounds, for the second half, just for the investment portfolio and the outlook for cap rates, over the next 12 months, are we expecting that further expansion offset by rental growth?
Yeah, I, I, I think that's the way to look at it. I'd, certainly, cash rates around the world are still settling. Bond rates are still settling. We believe the cap rates will move out over time, we also believe we've got some really, really good assets with a lot of built-in growth in the cash flows and very, very high occupancies. Yeah, I, I think that's the right way to look at it.
Is there much of a buffer between the rent and the values versus market rent left?
Yeah. Yeah. Yeah, I, I think in the valuations, it's probably picking up half where the market's sitting, roughly, Nick, I think.
Yeah.
Most
Yeah, that's right. I think we're printing evidence now and doing deals that then the valuers can use in the coming 6-12 months. Yeah, I, I think it's fair to say that the rent levels that are actually happening in the market are higher than kind of where the historic evidence is pointing.
Yeah. Okay. And just on 2024 guidance, you're sort of guiding to 90 basis points for the management division medium term. It sounds like you've got a bit more coming through next year. Can you provide a bit more color on where you think that'll land?
Yeah, look, I think if you, if you think about just, say, shifting everything out 6 or 12 months, then what? You know, it, it, it's gonna be around that level. Now, you know, things could happen, things could change, and we've got to take a view on things every rebalance date. Just work on 90 points for the moment. I think that's, that's the best way to look at it. It's the best guidance we can give you at this time.
Okay. One more, if I may. you, you sort of talked up, well, talked about, sorry, the, the urban, renewal story. is, is there anything sort of realizable, near term that we should be, thinking about?
Yeah, I, I think Australia needs it, doesn't it, near term? That doesn't seem to be going, gonna be the case. Look, we're, we're meeting with all the planning bodies. To be clear, particularly in New South Wales, we actually have a portfolio, particularly in Central West, running into South Sydney, closer into the train stations and the amenities, and also up in North Ryde, which goes into thousands and thousands and thousands of apartments. I think there's 20-odd thousand or 25,000, you know, on our big, big page. Probably a little more than that, actually. We're having discussions with the planning bodies right through the government in regard to what we can help do in regards to getting some high-density housing into, let's say, Sydney, Melbourne. You know, we've got great sites around Port Melbourne.
Look, I think it's a 10-year quest. Unfortunately, it needs to be sooner, but the infrastructure, the time, the red tape, the differences in regard to councils and programs, you only have to listen to Mr. Triguboff to understand the frustrations in regard to planning and timing. Look, big opportunity for people to help accelerate it. We have sites and land that primarily is really, really good for residential and a value add as far as our partners and ourselves concerned. Build-to-rent is important. We're working on some stuff nearer term. Let's say nearer term is probably two years in this sort of conversation. North Ryde is a dead center for us, for actually data center and build-to-rent.
All right. That's clear. Thank you.
Are there any more questions? It seems our operator's gone missing. Are, are there any more questions, operator? No? Maybe there are no more questions. Sorry, we're just pinging the operator.
You just wait with us for 30 seconds. I think our operator is dialing back in, and we'll pick up the tail end of the questions.
Hello. Apologies. Are you hearing me okay?
Yes, we're just getting to see if there's any other questions.
Terribly sorry. I lost, lost the internet connection for just a moment. I am back. One moment for our next question. Our next question comes from the line of Ben Brayshaw from Barrenjoey. Your question please.
Hi, Greg. Hi, Nick. I just have a couple of quick questions on cap rates for Asia. Just in relation to China, 5.3%. It hasn't moved the rest of the world to reprice. I was just wondering if you could comment on that, please. Hong Kong, up to 4.1% from 3.8%. I, I guess just the question there is, is that being informed by transaction evidence, or is that just the independent valuer taking a view? Any color on that would be appreciated. Thanks.
Yeah, China is pretty straightforward. Interest rates are coming down in China and simulation. We're just in the process of partnering up some pretty actually major portfolios in China at those sort of rates and those sort of levels with Chinese capital. From that point of view, there's transactional evidence around that. I think in Hong Kong, not a lot of transactional evidence, in Hong Kong, so that is very much a valuer's view and opinion. I think what'll happen, though, there, with what we're seeing, in regard to buildings being taken out of the market, and we're just taking another one out of the market actually for a data center as well. We've just given customers notice that that's for vacation primarily.
In Hong Kong, you've got buildings coming out of the market, and effectively very hard to buy any investment property. I think it's a valuer's best attempt at putting a, what they think, a building may clear in the market. I think it's a pretty safe, it's a pretty safe number as we're now seeing rent growth of around the 5, 6% coming into the market, and we're 99% occupied. We think that's a pretty safe number.
Yeah, I, I think the other thing, Ben, is that, the evidence-- there is some evidence on land and the value of land and replacement cost, and so that's giving the ability of valuers to get some form of triangulation on where the value is as well. It's not a, I suppose, a complete stab in the dark.
No.
Fantastic. Nick, can you just comment on development, production times, where the portfolio is currently? I think you were saying six months ago it was 20-21 months on average. Is it, is it still around that level?
Yeah, that's right. The production rate's around AUD 7 billion at the moment, That's consistent, AUD 13 billion with at around that sort of time in production.
Right. Okay. Thanks, guys.
Thanks, Ben.
Thank you. One moment for our next question. Our next question comes from the line of David Pobucky from Macquarie Group. Your question, please.
Well, morning, Greg and Nick. Can you hear me okay?
Yep.
Congrats on the result, thanks for taking my questions. Just again, on the composition of your guidance, please, just to clarify on performance fees, for FY 2024, what's in guidance, is it the AUD 100 million that was previously expected in the second half? Maybe anything else you might be able to disclose compositionally, please?
Yeah, good one to you, Nick.
Yeah, if you just back out the 90 points on a full year basis, it's AUD 150+ million of performance fees. If that answers your question.
Yes, I appreciate that. It's clear. again, just talking about the implications around bringing development onto the balance sheet. You touched on it a little bit there, but, you know, what are the implications in terms of margins, and capital intensity, and then what that might mean for FY 2024 earnings, please?
Yeah, look, look, I think development for 2024 earnings, a lot of that's already baked, as you would expect, as we're coming into-- we're into August, sort of moving September. We've got a, you know, really, really good head start on that as well. A lot of what we're doing now, though, is for 2025, 2026, 2027, in particular, currently. Anything that we're originating on balance sheet won't be a 2024 story. It'll be a 2025, 2026, maybe 2027 story as well, is the way, is the way it goes. We've got the balance sheet and the runway and the, the rotation of capital, because there are deals being done around the world, the markets are open, and industrial things are trading as well.
I think from that point of view, there is a marketplace, but we do see more opportunity over the next 6, 12 months than we did in the last 12 months, and the last 2 years, where money was obviously way too cheap and there was every player in town. We see real opportunity to get real value, and, yeah, we're, we're being pretty active.
I, I think in terms of your question around capital intensity, just look at what happened this year. Effectively, you know, we kept it pretty much flat. You know, if you constant currency basis, the overall allocation was pretty well flat. Total assets grew. Proportionate, proportionate allocation to development capital is actually down. That means we've probably got a bit of capacity to take on a bit more if we want to. That'll come down to when we contract to sell, how we contract to sell, you know, who's funding through to completion. Because it, you know, the those, all those different permutations can have impacts on working capital, but there's different risk of, you know, associated with those.
Over the years, you've seen, you know, that capital allocation swing around as a result of the timing of when and how we're contracting. The message to take away is, we've got a heap of capacity to move around through that cycle, through that, you know, development cycle, for the assets, without, you know, disproportionately impacting on, on capital management and risk.
Thank you. Maybe just one more, if I can sneak one in, please. Where do you see the greatest risks going into the next 12 months, you know, potentially around the slowing macro environment, et cetera?
Yeah, look, look, it's, it's around demand and, and, primary global recessions, is sort of where we've got to be careful. We have good spec programs around the world. We've got some buildings coming out of the ground in L.A. at the moment because there's nothing else available. We've got some stuff coming out of the ground around Tokyo. We've just got to be careful around how we flex that, where we do it. Once again, it's not everywhere, it's very micro. We've just got to watch demand equation. I think we've got the balance sheets built to withstand, a very, very sticky inflation and interest rate climate. We are not predicting interest rates coming down anytime soon, and they're going to be higher for longer, or longer than people would like, we think is going to be the outcome.
We've got the balance sheets to handle it all. It's just making sure we manage off that risk around demand, and make sure we stay close to our customers in regard to what their requirements are.
I think just on interest rates, Greg, interesting, point for people to note. We did a sensitivity analysis in terms of our net borrowing costs. If interest rates were 100 basis points higher, our net borrowing costs would be $1.4 million lower because we're a net receiver of floating rates at the moment with our cash and derivatives.
All right, great. Thank you. Appreciate it. Congratulations on the result again.
Thank you.
Thank you. One moment for our next question. Our next question comes from the line of Suraj Nebhani from Citi. Your question, please.
Oh, thanks, guys. Just a quick one again on the performance piece. Just wanted to clarify something from previous periods. My understanding was that, you know, overall revenue as a percentage of AUM was expected to be between 90-100 basis points historically, and I think, Nick, you called out 90 basis points that you expect over time. I'm just wondering, you know, has that come down or, you know, has something changed there?
Oh, just trying to be conservative. I think it's 90+ is probably a fair assessment. Just, you know, just being our conservative selves.
Fair enough. Okay, I think the other thing was on the development gains. You called out the, you know, $500 million of gains recognized on prior period sales this period. Can you talk to, you know, what the balance of these gains are currently, and, you know, when might they be realized?
Yeah. The balance is now, those that have not yet settled, is 200-
Yeah.
just over $270 million. That we expect those to settle in the coming financial year, FY 2024. I think it's important that people don't overread that statistic. We call it out so that you can reconcile our profit and the attribution of the fair value gains. Frankly, it's no real indicator of future performance or margins or anything like that, because there could well be substantial gains contracted or conditionally contracted, but there's been no fair value uplift recognized yet, just because of where we are in the development cycle for those assets.
There could be inventory assets which are not subject to fair value gains, that could be contracted or conditionally contracted at a point in time with substantial, embedded profits and margins that have not been brought to account. We don't call them out because there's no fair value adjustment on those. I really wouldn't get overly sort of analytical about it, other than it's, it's a, it's a way for you to reconcile the profit, or the operating profit reconciliations, over time.
Okay. All right. Just one final one on, you know, just a question around the residential side that James asked earlier. I'm just interested in, you know, what Goodman is, is looking at in the build-to-rent space. I guess, what sort of, you know, model are you approaching over there? Is that, is that more taking the asset on balance sheet, or is it just, you know, the development of the asset, and you set it off? Like, what's, what's, I guess, the model that you're looking for over there?
Yeah, I think we'll leave that business to the people that are really good at it. There's a number, like Greystar, and they do it globally and really, really good. Our job is to get the planning done, maybe we're bulldozing the buildings, you know, effectively and readying the site. Get the planning, make sure the infrastructure's in, then pass it on to the experts, and we don't profess to be an expert in build-to-rent.
Okay, thank you. That makes sense. Thanks a lot.
Thank you. One moment for our next question. Our next question comes from the line of Peter Davidson from Pendal. Your question, please?
Hi. Good morning, guys. Greg, you called out 3, 3 gig of available power for the DC expansion. Can you just sort of, you know, I'll ask you a series of questions and, you know, you can sort of encapsulate it all in one answer. What will the percentage share be on a go-forward basis? It's currently 30% of the WIP. What's the heuristic around it? What's the sort of predicted yield on cost? What kind of lease deals are you using? Are you using land only, warm shell, cold shell, full kit deals? Can you just put some parameters around all of that?
Yeah.
Thank you.
Look, look, yeah. Thanks, Pete. Look. Oh, there's another one.
Keep going, Pete.
No, that's it. I think.
Oh, that's it. Yeah. Look, at the moment, it's, we have powered shell. We have actually just sold land and done those sorts of things as well. At this stage, it's, we're powered shell, and they're 20-year leases, 3.5, 4, 4 bumps. The margins are in the parameters we're talking about, probably north of the parameters we're talking about being 7%, you know, for us to get excited about something, so be north of that. The infrastructure piece is something that we are looking at very, very clearly. If you go infrastructure, let's say the program around 3, 3 gigawatts would be close to AUD 30 billion of development. Put a number on it. If you go down the infrastructure route, it's probably AUD 60 billion.
We're look- and that's a different set of investors and a different investment, and there's a business element in that as well. Effectively, what we've got at the moment, Pete, in the work in progress, is clearly real estate, 20-year leases, good bumps, exit cap rates, let's say 4%, north of 7 cash. It's good, good development margins moving forward. When you go to the infrastructure model, as your infrastructure people will tell you internally, it's a different model. It's a business model. There's a different set of investors, and then the returns need to be higher in cash terms because you've got amortizations and depreciations and things of that nature. Look, it's... The thing to note about it, Pete, is demand is vertical, right?
Yep.
We've got inbound calls from all the big operators, users, not operators, the users in the world. We've got all, big calls coming through. This market is red hot, and will remain so over the next 5 years, particularly in Asia Pac and particularly in Europe. US is in a slightly different position in regard to size and scale, and I think they've got half the gigawatts of the world actually sitting in the US. A lot of that data is actually migrating from the US through now as Europe and Asia Pac gets more capacity. A lot of that data is progressing through to where the data is actually being generated and used, and getting closer connectivity with the users. AI and generative AI, it's, it's going to a totally different level.
That's why certainly in the last 12-18 months, we've got big players around the world that want us to go further. But to be clear, at the moment, work in progress is real estate, with real estate, effectively leases. The next stage is, you know, what we're looking at at the moment.
Greg, if it was infrastructure, would you do a partnership for that and keep that infrastructure as one of your funds or?
That, that would be, Pete, that would be an option. The more we've talked to the infrastructure investors around the world, we understand what they want. They want the, they want the business, and they want the operations. What we've got today is real estate, and it's basically owned with our real estate partners. That's pretty straightforward. You take it to the next level, then it's a different, it's a different platform. Absolutely.
Okay. All right, thank you.
Thank you. One moment for our next question. Our next question comes from the line of Alex Prineas from Morningstar. Your question, please.
Thank you, and thanks for the presentation. Just, can you comment on construction costs, both in terms of what, what pace they're accelerating at or what pace they're moving at, at the moment? Also, are they becoming a bit more predictable, and are you able to factor in, you know, slightly narrower scenarios?
Alex, we can't hear you. You might I don't know if you're speaking into a mic or into a phone. We can't hear your question.
Hi, can you hear me a bit better now?
Much better. Thank you.
Thanks. Just a question on construction costs. Can you comment on the, the pace of them, in terms of, you know, pace of increase, has that changed much? Secondly, are they becoming a bit more predictable, you know, perhaps enabling you to, to factor in a narrower range of scenarios into, into feasibility studies? Are you still having to, factor in a wide range of uncertainty there?
... Yeah, look, look, they're moderated around the world, effectively, we can predict them. We are, though, looking at more contingency. If you were carrying 5%, you'd be carrying 10% as an example of contingency, but moderating. The other thing we're doing in the main is trying to keep things pretty simple. We were looking at a 3-story building the other day, multi-story, in a certain location. We actually dropped it to 2, because it was gonna be easier to build, more predictable in regard to cost and a better return. Keep things simple, and I think we'll be okay. Costs are moderating, but not going down, I think importantly.
Okay, thanks.
Thank you. One moment for our final question. Our final question for today comes from the line of Richard Jones from JP Morgan. Your question, please.
Hi, hi, Greg and Nick. Quick question. Just on the development work on balance sheet, I think you noted it's gone from 15% to 19% last 12 months, starts at, at 26. Is that kind of a guide as to where we should be expecting the contribution in FY 2024?
Yeah. Nick, you got that one?
Yeah, yeah. As we said before, Jonesy, that, that statistic that you're seeing is the point in time.
Yeah.
With more origination on balance sheet, that trend will be in that direction. Yeah, I would, I would expect that most likely it will be trending up. You know, not necessarily, if we pre-contract and pre-fund, then that will switch into a third-party arrangement or a fund arrangement at a point in time. The propensity will be in that direction. If you think about what that means in terms of the proportion of income and the spread of proportion of income between fee-based versus above-the-line operating profit, we've said in the past that that is heading into the 50s. That'll give you a bit of a sense of kind of what's actually being generated in terms of profit share versus funding share, if you like, and that's why that- you'll have that gap between 50...
Let's say something in the fifties, profit share, but the funding share will be somewhere in the seventies. Does that, does that make sense, Jonesy? I think that's what you're asking, yeah.
Yep, yep. I think that's clear. Okay, just one more very quick one. Just, I know your accounts are saying that the Australian adoption of Pillar Two solution will have an impact on, on your tax. Just, just wondering if that is captured in guidance and if that has much of an impact.
Well, I think we haven't quantified it because we can't at the moment. The rules and the application of those rule, those rules have not been determined yet, we actually have no legislation or accounting basis to make an estimate. Anything we say, you know, is probably gonna be wrong. The, the, the real answer is we don't know at the moment. I don't think, you know, high level, I don't think it's gonna be a necessarily a big impact for us, but until we actually see the legislation and the application of it in the context of an Australian stapled security structure with a Hong Kong entity, and, and given our structure, I think it's fair to say that the...
How each country will apply the legislation, I, I, I, I, I struggle to see how we can actually get an estimate. I actually struggle to see how they can implement it, to be honest. Assuming they do, then we'll have to look at it at the time, and we'll update you if it is a material impact on guidance.
What was your tax rate this year?
It was a little under 10 this year. Obviously, because the performance fee recognition, was down, the effective tax rate was down.
Okay. Thanks. Cheers, Nick.
Thanks.
Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Greg Goodman for any further remarks.
Yeah, thank you very much. Thank you everyone on the line. Have a good, have a good day.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.