Goodman Silences The Critics

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Amidst fears of rising bond yields and industrial overcapacity, Goodman Group has proven yet again why it is a top 20 market cap stock.

-Goodman upgrades FY22 guidance for the third time
-Work in progress continues to increase and demand remains robust
-Rents increasing on near-full vacancies
-Guidance likely conservative, again

By Greg Peel

As a real estate investment trust (REIT), Goodman Group ((GMG)) has been a star performer on the ASX, rising 240% in the five years to end-2021. This has not been achieved by offering the sort of attractive dividend yield expected of REITs, and indeed Goodman’s yield has been minimal, rather capital appreciation has pushed the shares into the ASX Top 20.

The Top 20 previously included retail REITs Scentre Group ((SCG)) and Shopping Centres Australasia ((SCP)), but these large-caps ultimately succumbed to pandemic impact. While Goodman was initially sold down in the March 2020 covid panic, it thereafter rose 120% from its low to end-2021.

Goodman’s point of difference is it is an industrial REIT, not a retail or office REIT, and such was not impacted by lockdowns to any great extent. Indeed the REIT’s investment in and development and management of logistics assets, including distribution warehouses for online retail, has proven a pandemic winner.

The story has unfortunately been vastly different for Goodman investors in 2022, from the moment the Federal Reserve woke up to the fact it was way behind the monetary policy curve, and admitted high inflation was not “transitory” as previously insisted. More recently, the RBA has followed, and both central banks have begun a process of rapid interest rate normalistion post covid emergency levels.

Given investors typically turn to REITs for their yield, despite REIT distributions being zero-franked, rising government bond rates are the enemy of the REIT. As the attraction of a risk free yield via bond investment grows, the attraction of riskier REIT yields diminishes.

And it doesn’t help that Goodman is a low dividend payer. Since late December the share price has fallen -29%.

Adding to the turnaround in sentiment were comments from the global behemoth of online retail, Amazon, that the stay-at-home trend and subsequent growth in e-commerce over the past two years had led to an “overbuild” of warehouse capacity.

Allaying Fears

At Goodman’s March quarter trading update, management put these fears to bed, noting underlying demand for industrial facilities across the world remains robust, driving low vacancy rates and strong market rental income in almost all markets globally.

Yes, rising yields pose a headwind, but with tenant demand remaining exceptionally strong, rental growth is accelerating, which should cushion the negative impact of rising rates on property capitalisation rates and valuations.

For the third quarter in a row, management upgraded FY22 earnings growth guidance, to 23% this time from 20% prior, and 15% at the end of the first quarter. Goodman has exceeded full year guidance in each of the past four years.

Development work-in-progress rose to $13.4bn in the March quarter, up 6% quarter on quarter and 40% year on year, with Asia contributing 50% of this growth. Some $4.7bn of developments have been completed in FY22 to date and are 99% leased. While the average yield on development cost fell -20 basis points, at 6.5% it is still very healthy, analysts agree.

Margins were also very healthy at 50%, as Goodman is developing product on margins 250 basis points above market capitalisation rates.

Within Goodman’s fund management business, assets under management rose 1% in the quarter and 31% year on year.

In other words, management does not know what all the fuss is about, and neither do brokers. While the consensus target among FNArena database brokers covering the stock has slipped to $26.77 from $26.97 to reflect rising bond yields and rising costs, that’s still some 42% above the current trading price.

Agreeing FY22 guidance is likely conservative, as always, and after upgrading their earnings forecasts, four of five covering brokers retain a Buy or equivalent rating on the stock, with Ord Minnett sticking to Hold.

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