In previous article, an AREIT is an Australian Real Estate Investment Trust that owns and usually operates a portfolio of income-producing property.
Goodman Group (GMG) is a real estate group that invest in industrial property. They operate throughout Australia, New Zealand, Asia, Europe, UK, North America and Brazil. GMG’s performance in terms of operating profits have seen a rise from 2012 yearly report of $544 million to 2018 yearly report of $845.9 million. Additionally, their current market cap is at $27,371M.
GMG is considered a high risk and high return investment. The high return is evident in Goodman’s performance within the past 7 years as mentioned above. The most significant part of GMG’s success is the increase of globalising economies of previous years where online shopping has become a new phenomenon. GMG have attracted major logistic tenants such as Amazon, DHL and Toll Holdings for large scale warehouses and logistics facilities. This resulted in GMG’s performance in stocks have almost risen 60%, only which 2-3% from distributions, resulting in the company to be the highest performing AREIT.
According to GMG’s Half Year Results Presentation April 2019, the group has acquired and manages over 384 properties around the world. It also reveals that 72% of their earnings came from property development and funds management. These earnings are considered to be high risk as they are ‘cyclical’. This means you can earn a lot in a period but once the cycle turns the earnings can disappear very quickly. The other 28% of earnings come from rent (low risk due to the consistent revenue, stability and predictable. (in comparison to Scentre Group’s 79% of their earnings are from rental income).
Additionally, their Funds from Operations (FFO) is another measure of GMG’s earnings compared to their net income. GMG’s FFO is at $1.2b AUD which makes up 111% of its gross profit which means its earnings are recurring and high quality. But at the same time their FFO to debt ratio of 38% which is considered a significant risk. This would take GMG 2.65 years to pay off their debt using their operating income alone. Furthermore, using the price to FFO metric (P/FFO) to value GMG’s shares, their P/FFO is 20.76x. In comparison to other long-term REITs have an average of 16.5x meaning that GMG’s share price is overvalued.
GMG is still an attractive REIT, but I believe that logistics is slowing down due to Australia’s slow economic growth. I believe this will lead to GMG’s future share price to drop slightly but will recover after Australia’s economy begins to grow again making the logistics industry grow with it. However, this is YIG’s opinion and you must conduct more research before entering into the stock market.
The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Thomas He , associate of YIG.