Goodman

GROUP CEO'S
REPORT

DELIVERING VALUE

GREGORY GOODMAN

GROUP CHIEF EXECUTIVE OFFICER


I am pleased to report on the Group’s activities and achievements for the 2015 financial year. Goodman has performed strongly, delivering one of our best ever financial results. This reflects the focus the team has had on delivering to our business strategy, including the value we strive to add for all of our stakeholders and the sustainable long-term business we are building. Goodman is all about delivering value. This is highlighted by the quality of our product and service offering, the high standards of service we aspire to and the skill and dedication of our people. It is also evident in our enduring customer relationships around the world and our significant capital partnerships with global investor groups.


Goodman delivered operating EPS growth of 7.1% for the year, reflecting the strong underlying operating performance across our business and the customer demand for modern, well-located logistics and business space. Our demonstrated ability to provide flexible and diverse property solutions ensured we were well positioned to take advantage of the best opportunities in proven logistics locations globally and capitalise on the continued momentum in all of our operating regions. The Group was able to grow its operating earnings while at the same time lowering financial leverage, reducing gearing to further strengthen its balance sheet. This is a key point of difference and provides Goodman with significant financial and operational flexibility for future years.

  • $ 3.1 bn
    Development work in progress

Our strategic focus continues to be on improving the quality of our properties and the income we derive from them. Having one of the most geographically diversified operating platforms globally and a specialist industrial focus, has enabled Goodman to take advantage of the strong pricing for high yielding industrial assets and the significant available liquidity in the current low growth environment. In turn, we have selectively sold properties across the Group and our managed partnerships, disposing of $1.9 billion of investment properties (excluding urban renewal sites), mainly in Australia, Continental Europe and the United Kingdom. The capital realised from asset sales is being reinvested into our development business to finance new projects across Goodman’s global development work book. This approach is adding considerable value, with development providing the best risk adjusted returns at this point in the property cycle. Our development expertise means we can deliver new logistics space at a forecast yield on cost of 8.8% and replace existing assets with Goodman’s own high quality development product. This allows us to enhance overall portfolio and income quality and drive higher investment returns.

Intermarché, Poznan II Logistics Centre, Poland.

The merit of our strategic approach was demonstrated by the strong performance of Goodman’s development activities during the year, which saw our development work book grow to $3.1 billion and ensured we continued to be one of the largest developers of industrial property globally. This was driven by higher development volumes and customer demand for well-located and designed logistics space to help achieve greater operating efficiencies, particularly across the logistics sector, with factors such as supply chain consolidation and building obsolescence providing ongoing opportunities to add value. Importantly, we have maintained a low risk approach to our development activities, undertaking projects without pre-commitments only in selected markets and proven, quality logistics locations, with low vacancy rates and where demand for assets is high. On this basis, Goodman achieved a 91% pre-commitment for development completions in the 2015 financial year.

Highlighting the growth in our development activities during the year, in Australia we worked closely with customers to provide relocation solutions in proven logistics locations as a result of the change in use of traditional industrial sites, securing new projects on behalf of customers in South and Western Sydney. This reflects the Group’s dominant market position, with an Australian portfolio of over 200 properties and access to a sizeable land bank, we can provide our customers with a range of flexible solutions to cater for their changing business requirements.

Our New Zealand business experienced higher development volumes as a result of the sustained economic growth, with a number of development projects announced, including at Auckland’s Viaduct Quarter and Highbrook Business Park.

Goodman continued the measured roll-out of its development-led approach in markets such as China, where we maintained development volumes at around 650,000 sqm, taking advantage of the limited supply of logistics space in strategic locations around the major markets of Shanghai and Beijing. The growth in the level of recurring business with customers, particularly in the e-commerce and logistics sectors, has been a positive trend. This includes expanded relationships with French sport apparel and equipment retailer, Decathlon and logistics services provider, Best Logistics.


DHL, Roissy Airport Logistics Centre, Paris, France.

Japan continues to experience an undersupply of prime logistics space and our targeted development-led approach, which focuses on the most strategic locations, ensured we achieved strong leasing success during the year. Our developments at Goodman Mizue and Goodman Ichikawa at Tokyo Bay were both 100% pre-leased prior to completion. The buoyant customer demand also saw our Japan team commence the 116,527 sqm first phase of development for Goodman Business Park Chiba, a new large-scale, masterplanned, multi-use logistics and business park. On completion, the overall project will have an expected value in excess of US$1 billion.

In the United Kingdom, Goodman is benefiting from higher development volumes, driven by improving economic conditions. Increased customer confidence and growing business activity levels are being reflected in the new developments being undertaken in proven, core markets and our logistics and business park teams securing new pre-committed opportunities during the year. The Group’s business in Europe completed another solid year and was named “Number One Developer in Europe” by PropertyEU magazine for the fourth consecutive year, having completed nearly two million sqm of development in the period from 2012 to 2014. This result was mainly driven by Goodman’s leading position as the top developer for e-commerce logistics, and from the growth in the automotive, retail and third party logistics sectors. The large majority of development projects were pre-leased before the start of construction.


  • Operating EBIT by
    geographic segment
  • $ 30.3 bn
    Total assets under management

In the US, good progress was made on the roll-out of Goodman’s $2 billion development pipeline, taking advantage of the lack of quality space available in proven logistics locations in the Southern California, New Jersey and Pennsylvania markets. The team completed and signed a long-term lease for the 1.6 million sq ft (approximately 150,000 sqm) Goodman Logistics Center Rancho Cucamonga, in the Inland Empire market of Southern California, securing the customer, Georgia-Pacific, in one of the largest logistics leasing deals completed in Southern California in the past 10 years. Post 30 June 2015, we commenced the development of our 73 hectare site at Eastvale in the Inland Empire market, while we also continue to work through planning on prime land sites in New Jersey and Pennsylvania.

In Brazil, our focus remains on selective pre-committed opportunities. Through our WTGoodman joint venture, we secured two prime built-to-suit development opportunities, totalling 219,000 sqm, including a 74,000 sqm facility at International Business Park in Rio de Janeiro for the International Olympic Committee.

Our increased development activities and higher asset pricing strongly influenced the growth in the Group’s total assets under management, which increased by 13% during the year to $30.3 billion. This was predominantly the result of $2.5 billion of development completions and $1.5 billion of asset revaluations across Goodman’s portfolio, with significant valuation increases contributed by Goodman urban renewal sites in Australia.

We accelerated the pace in the roll-out of the Group’s urban renewal strategy over the last 12 months, taking advantage of this significant long-term opportunity for our business. We continued to work through our current urban renewal pipeline in Sydney and Melbourne, achieving positive planning outcomes on a number of sites. As a result, $1.1 billion of sites have been conditionally contracted for sale. While the Group has maintained its current urban renewal pipeline at more than 35,000 apartments, we see further opportunities to increase this meaningfully over time through the ongoing evolution of urban renewal precincts and as new sites are identified across our portfolio.


Goodman experienced robust operating activity across its stabilised property portfolio during the year. Our customer focused approach and commitment to managing and maintaining our properties to a high standard, were reflected in the strong leasing results achieved, and the high occupancy and customer retention levels maintained.

Goodman’s contemporary approach to its managed partnerships, investment offering and leading development capability are attractive to global investor groups and provide Goodman with a key competitive advantage. This ensured we retained the strong ongoing support of investment partners during the year, with Goodman raising $1.8 billion of new third party equity, primarily for our platforms in North America, China and Japan. Our managed partnerships are benefiting from the investor demand for high yielding industrial assets, with selective asset rotation and the prudent management of capital on behalf of investment partners providing access to quality opportunities not typically available on the market. In turn, our managed partnerships are well positioned to maximise investment returns and create long-term value for capital partners.

The scope of the operating activities and strategic initiatives undertaken by Goodman in the 2015 financial year has delivered a strong performance across its business globally. This has resulted in full year operating EPS of 37.2 cents, up 7.1% on FY2014 and operating profit of $653 million, representing an increase of 9% compared with the same period last year and consistent with the upgraded earnings guidance announced in February.

The total distribution paid for the full year was 22.2 cents per security, consisting of an 11.1 cent distribution in each half year period.

GROUP OPERATIONS

Goodman’s operations achieved an operating EBIT of $717 million, or an 8% increase compared with the same period last year, as a result of the organic growth and increased scale from Goodman’s existing markets. The Group’s active development and management businesses contributed 33% and 16% of operating EBIT respectively, which was driven by strong activity stemming from the limited supply of quality space and investor demand for high performing industrial assets. The growing contribution from development was a key factor in the Group’s earnings outperformance for the year. Goodman’s property investment activities contributed 51% to operating EBIT, with the earnings composition in line with expectations.

The contribution to earnings by Goodman’s international operations was 55%, reflecting the significant growth experienced in these markets and highlighting the value of the Group’s geographically diversified operating platform.

Further information on the Group’s operations for the 2015 financial year is available in the Group Operations section.

Debt Maturity Profile
  • 17.3 %
    Gearing

CAPITAL MANAGEMENT

Goodman is committed to maintaining its sound financial position as a platform for delivering sustainable growth and competitive returns on a “through the cycle” basis. We are well positioned in the current operating environment to capitalise on the favourable market conditions by continuing to sell assets and focus on our development activities to deliver growth in investment returns. By reinvesting capital from asset sales to fund our development activities across the Group and managed partnerships at this point in the property cycle, we are able to minimise the amount of new capital required and reduce Goodman’s financial leverage.

Our growing development work book means that the Group will retain its focus on reducing financial leverage and maximising available capital to reflect the increased earnings contribution from development. This ensures we are appropriately positioned to fund these activities, absorb any changes in market volatility and take advantage of growth opportunities over the longer term.

As a result, our gearing was 17.3% at year end, compared with 19.5% as at 30 June 2014 and is expected to reduce further. Coupled with available liquidity of $1.8 billion, this is providing Goodman with considerable financial flexibility for future periods.

During the year, we also continued to focus on diversifying our debt funding sources and demonstrated our ongoing access to global debt capital markets. Across the Group and managed partnerships, we procured $5.7 billion of debt facilities, predominantly to refinance existing facilities, achieving an average term of 4.5 years at current market rates. Furthermore, the Group has focused on maintaining its stable and sustainable long-term corporate credit rating with debt rating agencies, Standard & Poor’s and Moody’s Investor Services (Moody’s) at ‘BBB stable’ and ‘Baa2 stable’ respectively. Separately during the year, Goodman European Logistics Fund (GELF) had its credit rating upgraded to ‘Baa2’ by Moody’s.

Goodman Interlink, Hong Kong.

OUTLOOK

Goodman has completed a very successful year, reflecting the quality business we are building for the long term. We are well placed to capitalise on our position as a leading industrial property group, with a strong platform in place for FY2016 and future periods, to deliver sustainable earnings growth and create long-term value for all of our stakeholders.

The Group is taking advantage of the demand for prime industrial property and selectively undertaking high quality growth opportunities in key logistics markets globally. The prevailing market conditions continue to provide Goodman with attractive opportunities to improve asset and income quality across its portfolio, which is core to our business strategy. This is being facilitated by our geographically diversified operating platform and skilled team of people, enabling Goodman to realise targeted opportunities to rotate assets, including from our urban renewal initiatives, and reinvest significant capital into the development activities of the Group and our managed partnerships. This will provide our business with considerable future financial flexibility, while maintaining a strong balance sheet.

For FY2016, Goodman expects the strength of its development activities and access to a significant pipeline of opportunities, demand from investment partners and the ability to deliver modern and efficient property solutions for its global customer base to be key drivers of earnings. The Group is forecasting full year operating earnings per security of 39.4 cents, up 6% on FY2015 and a distribution of 23.8 cents per security.

On behalf of the Board and executive management team, I would like to thank all of our customers, capital partners and Securityholders for their ongoing support. In particular, I would like to thank our team of people around the world for their outstanding contribution to Goodman’s strong performance over the last year. It is their ongoing dedication and commitment to delivering quality and creating value for all of our stakeholders, which is fundamental to driving the sustainable long-term growth and success of our business.

GREGORY GOODMAN

GROUP CHIEF EXECUTIVE OFFICER

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