Goodman Group Confident Of Contracts Flowing

Australia | 11:00 AM

The market wanted an upgrade and fresh leasing announcements. Goodman Group's Q3 update didn't deliver. Analysts remain positive on the group's expanding data centre pipeline, pricing power and long-term exposure to AI-driven demand.

• Goodman Group reiterates data centre strategy at 3Q results
• Multiple contract wins expected through the first half of FY27
• Competitive moat widens, operating EPS guidance slightly up
• Potential for development yields to beat market expectations

By Mark Woodruff

While anticipated leasing deal announcements did not eventuate, leading global industrial and data centre developer Goodman Group ((GMG)) used its third-quarter result to reaffirm a deliberate strategy of deploying balance sheet capital ahead of customer commitments to secure scarce power-enabled metropolitan data centre development capacity.

The business continues to shift toward a larger mix of higher-margin data centre developments relative to traditional logistics assets, supporting long-term earnings growth albeit alongside extended project delivery timelines, stockbroker Morgans explains.

Data centres now account for 73% of Goodman’s development work in progress (WIP) and market conditions remain “pretty hot”, according to management, supporting pricing power across the development portfolio.

Operationally, Morgans views the market update as mixed, with pre-commitments, production run-rate and yield-on-cost all broadly flat half-on-half.

The more strategically important takeaway, in the broker’s view, is management’s observation that global data centre capex requirements are likely exceeding available funding capacity, creating a favourable backdrop for operators with secured power access, development sites and established capital partners.

While the total power bank expanded further, Macquarie highlights no new customer contracts were announced, and market expectations continue to sit above current guidance.

Management noted multiple non-disclosure agreements (NDAs) have already been signed and customers are progressing through due diligence, with Morgan Stanley expecting several contracts to be secured by December.

Providing further confidence in outcomes, this broker explains contentious items between parties concern a ready-for-service date, rather than rent or lease duration.

Management's guidance has been subtly upgraded to "at least" 9% in FY26 operating EPS growth versus consensus expecting 9.7%.

FY26 DPS guidance of 30c has been maintained, broadly in line with consensus' expectation of 30.2c.

Where is the upside?

Goodman benefits from a strong data centre development pipeline, an established global logistics and industrial platform, and a high-return funds management structure.

Macquarie explains upside drivers to the business and management guidance are performance fees and percentage of development completions.

As development projects complete and market valuations crystallise, Citi anticipates performance fees will surprise to the upside.

UBS also points to Goodman’s enviable access to capital across global markets, alongside strategically located warehouses and landbanks that can be repurposed into higher-value data centres and modern logistics facilities.

UBS highlights the group’s major Los Angeles data centre development project (LAX01) located in Vernon, California, and the Hong Kong data centre development project (HKG10) are closer to securing contracts than the Sydney and European projects.

Competitive moat

Goodman added 400MW, to its power bank during the March quarter, taking the total pipeline to 6.4GW. Jarden notes additional contributions were largely driven by the Australian operation.

With 3.6GW of the 6.46GW already secured and a further 2.8GW in advanced procurement, Citi views Goodman’s global power bank as a competitive moat that would be extremely difficult to replicate.

Management maintained its FY26 development WIP target of $18bn, up from $14.5bn in the March quarter, with major European data centre projects in Amsterdam and Paris expected to drive the step-up during the current quarter.

Bell Potter explains the rise in development WIP (expected by management) will occur during the fourth quarter as several large European data centre developments formally enter active construction and are recognised within the WIP pipeline.

Run-rate and yield-on-cost

Bell Potter expects fourth-quarter momentum to lift Goodman’s annualised development production run-rate above $6bn, reflecting the pace of development activity managed across the portfolio over a rolling 12-month period.

The increase is being driven by two factors: a larger overall development pipeline; and longer construction timeframes for data centre projects compared with traditional logistics developments.

Another measure is yield on cost, a property development metric that measures the expected annual income generated by a project relative to the total cost of development.

Management also reiterated data centre yield-on-cost targets of 9%-11%, with industrial developments continuing to generate yields above 7%.

Strong expected leasing outcomes across Tokyo, Hong Kong and European data centres prompt Ord Minnett to lift its yield-on-cost assumption for the development pipeline to 10% from 9.5%.

Assuaging market fears

Citi views Goodman’s balance sheet as well positioned to fund the accelerating data centre expansion pipeline, with no signs of near-term capital pressure.

As major customer signings across the market have been announced by peers, Bell Potter explains the market continues to await stronger leasing momentum, particularly at LAX01.

Goodman’s long track record as a customer-first operator suggests the slower pace likely reflects project timing, leasing complexity and development sequencing rather than weak demand, the broker believes.

Bell Potter adds both management and broader industry commentary continue to point to robust demand conditions and strong rental growth where supply remains constrained.

---