Leading Independent Investment Research, Morningstar, Inc.

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Leading Independent Investment Research

Morningstar, Inc.

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Equity Bottom-Up

Goodman Property Trust / Equity Bottom-Up

We’ve increased the forecast level of developments Goodman is expected to deliver over fiscal 2018 to 2020, which boosts development earnings and just as importantly reduces the earnings drag of holding vacant development land. Our fair value estimate increases 5% to NZD 1.30 from NZD 1.24, with the no-moat-rated Goodman fairly valued at current levels. Our upgraded outlook for development is largely due to the higher floor space requirements of firms selling product through digital channels rather than brick and mortar shopfronts. The growing space requirements of firms serving consumers and business partners is evident in Goodman having recently committed to six new Auckland developments with incremental development cost of NZD 107 million. This increases the development workbook from the NZD 97 million at March 2017 to just over NZD 170 million.The cost to Goodman of holding vacant development land has been material drag on cash flow for many years. The annual holding cost doesn’t feature in earnings, rather as a below-the-line cost for capitalised interest and other holding costs. Following the purchase of the balance of the Highbrook Estate, Auckland in 2012, non-income generating land exceeded 12% of property assets. In the subsequent years, holding costs created a significant drag on cash flow, with annual holding costs over fiscal 2012 to fiscal 2014 more than 33% of underlying earnings. As Goodman progressed the build-out of the Highbrook Estate and other land holdings, the earnings drag has fallen materially, with fiscal 2017 below-the-line holding costs totaling NZD 15.6 million or 16% of underlying earnings. The increase in Goodman’s development activity plus lower average borrowing costs will collectively reduce annual holding costs to a far more respectable NZD 8 million or 8% of underlying earnings in fiscal 2019.In contrast to North America and Europe, the major global online retailers have not established a presence in New Zealand as the small population dilutes the scale benefits usually associated with online retail. Given online retailers have significantly lower occupancy and sales costs, it is inevitable that local online players will flourish at the expense of some retail stalwarts. This is clearly evident in the retail sales data, with total online shopping up 8% for the year to July as compared with 2.5% growth for brick and mortar retailers. For Goodman this is good news, as it drives demand for logistics space. The requirement for online retailers to pack and dispatch individual items in the warehouse is why they typically require more floorspace per dollar of sales than traditional retailers.Analyst: Tony Sherlock

We’ve increased the forecast level of developments Goodman is expected to deliver over fiscal 2018 to 2020, which boosts development earnings and just as importantly reduces the earnings drag of holding vacant development land. Our fair value estimate increases 5% to NZD 1.30 from NZD 1.24, with the no-moat-rated Goodman fairly valued at current levels. Our upgraded outlook for development is largely due to the higher floor space requirements of firms selling product through digital channels rather than brick and mortar shopfronts. The growing space requirements of firms serving consumers and business partners is evident in Goodman having recently committed to six new Auckland developments with incremental development cost of NZD 107 million. This increases the development workbook from the NZD 97 million at March 2017 to just over NZD 170 million.The cost to Goodman of holding vacant development land has been material drag on cash flow for many years. The annual holding cost doesn’t feature in earnings, rather as a below-the-line cost for capitalised interest and other holding costs. Following the purchase of the balance of the Highbrook Estate, Auckland in 2012, non-income generating land exceeded 12% of property assets. In the subsequent years, holding costs created a significant drag on cash flow, with annual holding costs over fiscal 2012 to fiscal 2014 more than 33% of underlying earnings. As Goodman progressed the build-out of the Highbrook Estate and other land holdings, the earnings drag has fallen materially, with fiscal 2017 below-the-line holding costs totaling NZD 15.6 million or 16% of underlying earnings. The increase in Goodman’s development activity plus lower average borrowing costs will collectively reduce annual holding costs to a far more respectable NZD 8 million or 8% of underlying earnings in fiscal 2019.In contrast to North America and Europe, the major global online retailers have not established a presence in New Zealand as the small population dilutes the scale benefits usually associated with online retail. Given online retailers have significantly lower occupancy and sales costs, it is inevitable that local online players will flourish at the expense of some retail stalwarts. This is clearly evident in the retail sales data, with total online shopping up 8% for the year to July as compared with 2.5% growth for brick and mortar retailers. For Goodman this is good news, as it drives demand for logistics space. The requirement for online retailers to pack and dispatch individual items in the warehouse is why they typically require more floorspace per dollar of sales than traditional retailers.Analyst: Tony Sherlock

Goodman's Higher Development Rate Reduces Cash Flow Drag on Vacant Land. FVE Raised to NZD 1.30