Australia | Jun 03 2025
Despite a slight miss against FY25 earnings expectations, Goodman Group's third quarter operational update signaled growth ahead.
-Goodman Group's Q3 disappointed as FY25 EPS guidance was not upgraded
-Management notes long-term structural demand drivers are intact
-Yield-on-cost debate for data centres
-Groundwork sets-up material FY26 upside, says Morgan Stanley
By Mark Woodruff
When industrial property and digital infrastructure specialist Goodman Group ((GMG)) first listed on the Australian Securities Exchange in 1995 as the Goodman Hardie Industrial Property Trust, it held just eight industrial properties in Sydney, collectively valued at around $75m.
Fast forward to 31 March 2025 and the group has transformed into a leading global owner, developer, and manager of industrial real estate. The company now has $13.7bn in development work-in-progress (WIP), up from $13bn at the end of 2024, driven in part by the addition of two new data centre projects in the third quarter: LAX01 in Los Angeles and HK10 in Hong Kong.
This development WIP represents an annualised production rate of $6.2bn, down from $6.5bn at the end of the first half of FY25. WIP is 60% pre-committed, with 68% either pre-sold or being built for third parties or partnerships.
There are now 66 projects across Asia, the Americas, Australia & New Zealand (A&NZ), and continental Europe & the UK, with a respective WIP allocation of 40%, 23%, 20%, and 17% for the combined continental Europe & UK region.
Including the Goodman Property Trust (listed in New Zealand), the total property portfolio value is $85.8bn, with Partnership assets under management (AUM) of $71.8bn.
The group operates an integrated business model with three interlocking segments: property ownership (steady rental income), property development (the most profitable), and investment/funds management.
Back in the year 2000, Goodman's trust merged with Macquarie Industrial Trust (forming Macquarie Goodman Industrial Trust). This partnership with Macquarie Bank provided scale and capital, helping to accelerate growth.
International expansion followed with Goodman entering New Zealand in 2003 and then pushed into Asia and Europe in the mid-2000s.
Honouring this tradition, the group continues to work with several infrastructure and real estate partners across the globe to establish vehicles for development and long-term ownership.
Operational update
Goodman Group's third-quarter FY25 operational update highlighted ongoing momentum across various logistics and data centre initiatives. However, analysts did note the absence of any new announcements regarding data centre lease agreements or capital partnerships.
Management re-affirmed FY25 guidance of 9% operating EPS growth, below consensus expectations of between 10-10.5%, as the market got accustomed to management upgrading guidance at this stage into the financial year.
Full-year distribution guidance of 30 cents was also maintained.
Despite the notable absence of an upgrade to guidance, Macquarie remains confident Goodman management can still deliver an earnings beat via performance fees and development income.
Notably, Morgans observes FY25 marks the first time since at least FY18 Goodman has not upgraded guidance in its third-quarter update. Nevertheless, this broker too retains a positive outlook, citing management's ability to leverage access to power in constrained infill markets and capitalise on growing data centre demand.
Morgan Stanley believes the groundwork is being laid for meaningful upside in FY26.
Work-in-progress
Backing Morgan Stanley's assertion, management confirmed "substantial" data centre work will be reflected in WIP over the next year, implying it could reach around $20bn, which compares favourably to Morgan Staley's prior $13.8bn forecast.
Data centres in Artarmon (Sydney), Paris, and Frankfurt are close to being officially put into WIP as fully fitted facilities, potentially boosting WIP by around $4.4bn over the coming months.
While Group CEO Greg Goodman noted "long-term structural demand drivers are intact, the uncertain economic and trade environment is delaying customer decisions in the logistics space".
Courtesy of a very timely $4bn capital raise in February there is available liquidity of circa $6bn to take advantage of the current market by acquiring large-scale sites which will be future long-term regeneration opportunities.
The capital raise consisted of a $4.0bn institutional placement plus an additional $400m retail offer but, amidst a broader share market sell-off, retail shareholders only contributed $5.1m.
According to Goodman management, as customers aim to improve productivity, their focus remains on key locations, intensification of warehousing, and rising automation and technology.
The group is planning for profits in a three-to-five-year timeframe, by conducting due diligence on several billion dollars of mega-sites, targeted for potential "Dual-Purpose" (data centre plus industrial), catering for new age robotic warehouses, explains Morgan Stanley.
Data centres
Data centres now account for more than 50% of Goodman Group's WIP, and management continues to see "significant capex growth from hyperscale operators as they work to meet rising demand for cloud services and AI".
Morgans highlights management's confidence is underpinned by the group's strategic exposure to metropolitan, low-latency locations.
The broker also points to a yield-on-cost (YoC) of 9% for recent project commencements, well above the 7.1% average across WIP, as evidence of stronger profitability in newer developments.
YoC is used to assess the profitability of a new build or redevelopment project and to compare returns across different asset types (e.g., data centres versus office buildings).
Ord Minnett, the only broker in the FNArena database to sharply cut its target price (by -8%), takes a more cautious view. (As an aside: Ord Minnett is whitelabeling research issued by Barrenjoey).
The key revenue driver for data centre assets are megawatts (MW) of installed IT capacity, explains the analyst.
Goodman's latest projects, LAX01 and HK10, are expected to deliver 32.5MW of installed IT capacity from 50MW of gross power, translating to a conversion ratio of approximately 1.5x. This ratio falls about -20% short of the broker's prior assumptions, leading Ord Minnett to conclude Goodman's data centre development business has moved up the risk curve, without a corresponding uplift in return metrics such as YoC.
After applying the lower conversion ratio across Goodman's long-term pipeline (through the mid-2030s), Ord Minnett lowers its pipeline valuation down to $150bn from $190bn previously.
By contrast, part of Morgan Stanley's investment thesis for Goodman is the potential for YoC (now 7.1%) to rise materially higher.
Clearly, assumptions vary between analysts and minor changes strongly impact valuation. UBS cites a double-digit YoC as helping underpin its forecast for strong medium-term development margins going forward.
The latter broker also welcomes management's upbeat commentary relating to data centre capital partners, along with ongoing progress in commencing profitable data centre projects.
Note: UBS's investment thesis centres on the longer-dated data centre pipeline, underpinned by cloud migration and AI adoption, where the broker sees limited oversupply risk.
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