An active market demands active management

Management report

A sustainable investment strategy, focused on building a high quality and resilient business, is differentiating GMT as a premium property provider. The Trust is investing in proven locations throughout Auckland and pursuing an active development programme that is delivering award winning properties. It’s a successful strategy that is creating thriving business communities like Highbrook Business Park. With a current value of over $1.1 billion, this estate is a significant driver of the Trust’s financial performance and the main contributor to this year’s $114.7 million portfolio revaluation

Financial performance

The benefits of a high quality property portfolio and an investment strategy focused on the Auckland industrial market are being reflected in GMT’s financial results. Highlights include:

  • $220.5 million profit before tax (including revaluations of $114.7 million), compared to $247.9 million (including revaluations of $145.8 million) previously.
  • Operating earnings of $121.7 million before tax or 9.51 cents per unit, consistent with earlier guidance and 1.1% higher than the previous period.
  • A 15.9% increase in cash earnings to 7.08 cents per unit and full year cash distributions of 6.65 cents per unit.

A comprehensive summary of this year’s financial performance is provided on page 16.

Property portfolio

The advantages of a modern and well located property portfolio are evident in the positive leasing results being achieved by GMT. Over 154,000 sqm of new customer commitments, representing almost 16% of the total area, were secured in the last 12 months.

This leasing success meant that at 31 March 2017, the occupancy rate across the portfolio had increased to 98% and the weighted average lease term extended to 5.8 years. The sustained customer demand is also facilitating an active development programme. Eight new projects, with a combined total cost of $97.0 million, were announced during the year. These projects utilise over five hectares of development land and provide:

over 31,000 sqm of high quality space, around 60% pre-committed to customers on long-term leases;
+ annual revenue of $6.7 million once fully leased and income producing; and
yield on additional spend of 8.7%.

GMT has accelerated its development programme in recent years, taking advantage of strong property market conditions. With more than 75% of the portfolio developed since 2004, it is a key business activity that is transforming the Trust. Following the completion of current projects, GMT’s investment in the preferred Auckland industrial and business park sectors will have increased to over 77% of total property assets, while its land weighting will have reduced to just 7%.

The increasing capital allocation to Auckland is a deliberate strategy that reflects the strong growth profile of the city and the positive investment characteristics of industrial property. It also positions GMT to benefit from the increasing demand for logistics space as a result of e-commerce. Online shopping is increasing the requirement for distribution warehousing in many global markets. It’s an emerging trend that is also adding to the attractiveness of industrial property as an investment class.

Valuation outcome

Strengthening property market fundamentals and sustained demand from both local and offshore investors have contributed to another strong valuation result for GMT. With an overall gain of $114.7 million, it is the second consecutive year of fair value gains of more than 5%. The positive result reflects the quality of the Trust’s assets, rising market rentals and buoyant investment market conditions. 

With continuing low interest rates, investors are competing for prime properties and paying record prices. The strength of this investment demand is demonstrated in the 0.45% firming in the portfolio capitalisation rate, to 6.50%. The positive shift in this key valuation driver also reflects a change in the composition of the portfolio with ongoing development and sales activity improving the overall quality. GMT’s industrial properties recorded the greatest gains. These assets were valued on a weighted average capitalisation rate of 6.3% while the smaller office portfolio had a weighted average capitalisation rate of 7.5%. The positive market dynamics and unique investment characteristics of prime Auckland industrial property mean this asset class is now valued at a premium to office property.

To take advantage of these market conditions the masterplan for Highbrook Business Park has been revised to incorporate a greater proportion of industrial facilities. Repurposing commercial land will expedite its development into high quality income producing industrial assets. Now over 75% completed, the $1.1 billion estate recorded an overall revaluation gain of $71.4 million or 6.8% in 2017.

Sustainable growth

The buoyant investment market that is reflected in the Trust’s strong valuation result is also supporting a successful sales programme. GMT has continued to take advantage of the strong investor demand with four asset sales, totalling $278.8 million, during the year. The sales included the disposal of GMT’s office assets at 600-604 Great South Road in Greenlane for $210 million, the largest sale ever undertaken by GMT. The Trust has also made a strategic acquisition with the conditional purchase of two adjoining industrial properties in West Auckland for $18.9 million. Close to the CBD and with direct access to SH16 from the Lincoln Road interchange, the former boat building facilities will be amalgamated into one estate and progressively redeveloped over time.

Following the 31 March 2017 balance date it was also announced that the Wynyard Precinct joint venture had conditionally acquired Bayleys House in the VXV Precinct for $62.3 million. The recently completed, 5 Star Green Star design rated office building complements the joint venture’s existing Viaduct properties and is consistent with an investment strategy that is focused on creating a high quality portfolio.

Capital management

A sustainable growth strategy has enabled GMT to advance its development programme without new equity funding. At 31 March 2017 GMT’s look through loan to value ratio was just 30.6%, a reduction from 33.9% last year and significantly below the 50% threshold permitted under its debt and Trust Deed covenants. 

The Trust has improved an already strong balance sheet position by selling assets and paying down debt. With significant balance sheet capacity and available debt facilities, GMT has the necessary liquidity to fund all its current development objectives. The Trust has a very diverse and long dated debt book with less than half of its drawn borrowings provided by its banking syndicate. The issue of retail bonds and USPP notes in recent years have made the business more resilient. It’s a prudent approach that recognises credit markets can become volatile and bank lending more restrictive. An extension to the Goodman+Bond programme was launched on 18 May 2017 with a $75 million, seven year, retail bond. The new initiative, which has the ability to accept up to $25 million of oversubscriptions, will further improve the capital structure of GMT. One of the key features that has underpinned the success of previous bond issues is the quality of GMT’s property portfolio. The excellent security it provides is reflected in the investment grade rating from Standard & Poor’s. The rating agency recently re-affirmed its BBB rating for the Trust and BBB+ for the Trust's secured debt. An assessment that has remained stable since it was first assigned in 2009.

Looking ahead

The Goodman brand is widely recognised as the high quality benchmark for industrial and business space property. An investment strategy focused on the Auckland industrial market has created a modern portfolio that provides essential business infrastructure for the 240 companies that lease space from GMT. Continuing development and leasing success, together with ongoing transactional activity is enhancing the portfolio, and helping to create a more resilient business. It’s a sustainable approach to growth that is realising the value in the Trust’s land holdings and improving the quality of its earnings.

Taking advantage of the positive operating environment that exists and intensifying the build-out of Highbrook over the next three years remains an important focus. It will further reduce the Trust’s land weighting and continue to improve cash earnings, both key longer-term objectives.

JD 200x100

John Dakin
Chief Executive Officer

Andy E signature 200w

Andy Eakin
Chief Financial Officer

The benefits of a high quality property portfolio and an investment strategy focused on the Auckland industrial market are being reflected in GMT’s financial results.