property + asset management

Analysts focus on Goodman Property’s slow change in governance

May 22, 2014

advertised in National Business Review NZ Property Investor | Thursday May 22, 2014
Analysts remain underwhelmed by Goodman Property Trust’s [NZX: GMT] healthy profit result posted last week.
The trust last week announced a rise in full-year after-tax profit by (© Copyright Protected – The National Business Review 68) 72% at $134.1 million. The result was helped by unrealised revaluation gains of $23.8 million.
Morningstar rates the stock a “hold” while Forsyth Barr rates it (© Copyright Protected – The National Business Review 66) “neutral.”
Morningstar’s Tony Sherlock says higher development earnings are tempered by rising borrowing costs.
“Our fair value estimate increases to $1.10, with (© Copyright Protected – The National Business Review 33) Goodman slightly undervalued at current levels. We retain Goodman’s no-moat rating, as despite having a portfolio of higher-quality assets, there are few sustainable competitive advantages (© Copyright Protected – The National Business Review 25) mainly because of low entry barriers (to the industrial sector).
Mr Sherlock says there were no surprises in Goodman Property Trust’s report or outlook, with distributable earnings before tax (© Copyright Protected – The National Business Review 97) of $8.36c per unit in line with expectations.
“The business continues to perform solidly, underpinned by positive domestic economic conditions. This is evidenced by occupancy rising 1% (© Copyright Protected – The National Business Review 88) to 97% and the firm expecting to maintain this level for the foreseeable future.
The outlook for development continues to improve, with completions up 24% to 60,000m2, and commitments for 2015 (© Copyright Protected – The National Business Review 21) at 28,000m2 at this stage of the new financial year.
“Goodman is planning to accelerate the reduction in development land from the current 10.3% but we’d appreciate a more definitive (© Copyright Protected – The National Business Review 67) time frame to get to the targeted 5% weighting.
“While having a large land bank provides growth options, such as in the current environment, it creates a cashflow drag, which will become (© Copyright Protected – The National Business Review 8) more protracted if market conditions deteriorate,” Mr Sherlock says.
He also says Goodman is taking “pleasing steps” to adopt better corporate governance practices. These include (© Copyright Protected – The National Business Review 29) allowing unitholders to nominate and vote on the appointment of independent directors and a change in management fee arrangements, whereby the manager (Goodman Group) will be remunerated via shares, (© Copyright Protected – The National Business Review 89) “promoting alignment.”
“The agreement to not charge management fees on development land is an unexpected positive, saving up to $1 million annually. These are not transformational (© Copyright Protected – The National Business Review 51) changes, but are nonetheless viewed positively.”
Meanwhile, Forsyth Barr’s Jeremy Simpson says the trust is “back in the game,” benefiting from a pick-up in development (© Copyright Protected – The National Business Review 39) activity, overshadowed by the positive governance initiatives. He has increased his target price range from $1.01 to $1.08.
Mr Simpson says the governance changes were long overdue – including (© Copyright Protected – The National Business Review 52) unit holder nomination and voting for independent directors, the management fee rebate on development land, and a much higher level of asset recycling.
“These are all positive and bring (© Copyright Protected – The National Business Review 31) Goodman more in line with the sector. We believe returns to investors have been affected by sizeable equity issuance over many years [significantly more than its peers], with Goodman lagging sector (© Copyright Protected – The National Business Review 16) returns.
“The ball remains in Goodman’s court to get some runs on the board and execute this strategy to build investor confidence. An area that remains to be addressed for the (© Copyright Protected – The National Business Review 66) sector is basing dividends on a more sustainable adjusted-funds-from-operations pay-out policy.”
Goodman has one of the highest levels of dividend payouts that are higher that (© Copyright Protected – The National Business Review 54) adjusted-funds-from-operations.
“Goodman has a large portfolio of prime industrial and suburban office assets that is centred on Auckland, with its key asset the Highbrook Business Park. It (© Copyright Protected – The National Business Review 11) has a resilient portfolio and is working through its land bank with the sharp pick up in development activity,” Mr Simpson says.