Should you buy, hold or sell Goodman Group shares?

While listed property has generally felt pain during the rate hiking cycle, the environment has presented opportunities to identity and accumulate high quality property plays during a pull-back.

For Medallion's Australian Equities Growth Fund our only current property exposure, in the industrial property development and management space is Goodman Group (GMG).

After falling from $26 to $16 through 2022, GMG has since risen impressively to over $35, during a period where others in the space have struggled with high debt and reduced valuations.

We remain content long-term holders and all else being equal, we would gladly take the opportunity to bolster our current position if we're presented with periods of market-wide weakness.

A top tier global industrial property play

Goodman Group primarily owns, develops, and manages industrial real estate, including the likes of logistics facilities, warehouses, and business parks.

Goodman are one of the highest quality businesses on the ASX and widely considered as one of the top two industrial property companies throughout the world.

With a $80.5 billion property portfolio and $12.9 billion of projects under development, the business holds the highest calibre tenants, has a weighted average lease expiry of 5.1 years and a current occupancy rate of approximately 98%.

Global portfolio of blue-chip clients

Goodman have built a strong presence in Australia, New Zealand, Europe, Asia, North America and South America, with management looking to strategically develop modern, high-quality properties in key gateway cities throughout the world.

Of the earlier mentioned 98% occupancy rate, the quality of tenants must also be admired. Not only are Goodman a key global partner with e-commerce behemoth Amazon, other customers include the likes of Deutsche Post, Samsung, Tesla, BMW, A.P Moller - Maersk, Japan Post (Toll), JD.com, Coles and Australia Post.

Low gearing maintained in a high-rate environment

It hasn't always been smooth sailing for Goodman whose management have certainly learned from earlier mistakes and re-positioned the business to operate in a far more conservative manner.

During and after the global financial crisis, Goodman was in crisis thanks to a mountain of debt and an unwillingness of banks to make life easy for the business. Throughout this period, the share price very much reflected the pain, seeing a fall from above $30.00 to below $1.00.

Management made the decision to raise capital, pay back the bank and vowed to never allow themselves to be in that situation again.

Instead of heavy bank debt, they now primarily utilise a partnership model for developments, with around 77% of current projects being undertaken via partnerships or third parties, a move which has led to a gearing level of just 9% in 1H24 (22.7% on a look-through basis), one of the lowest in the global property space, with many comparable companies gearing at 30-100%.

The old adage of 'high rates kill real estate investment trusts (REITs)' has left other property players feeling the pinch of this high-rate environment but Goodman's conservative strategy in relation to funding has seen the business hold up extremely well.

First-half results confirm Goodman as a standout in the property sector

Operating profit increased a strong 29% year on year to $1.127 billion, with earnings per share up 29% over the period to 59.2c.

A statutory loss of $220.1 million was attributed primarily to property re-valuations which were generally expected given current property market climate.

The balance sheet remained robust with $3 billion of cash and undrawn lines. Interestingly, of the current $12.9 billion work in progress, 58% of those sites have pre-committed tenants with a Weighted Average Lease Expiry of 14 years, meaning this definitely isn't a build and hope strategy.

According to CEO Greg Goodman, it is expected that supply constraints at Goodman's investment locations will drive rental income growth and high occupancy rates for both their industrial and digital infrastructure portfolios looking ahead.

Data centre exposure

Worth particular mention is Goodman's focus on the rapidly growing data centre theme, with these digital infrastructure-linked projects now representing approximately 40% of current works in progress and ensuring Goodman play a major role in a booming part of the economy with data requirements rising rapidly.

GMG well placed to capitalise on emerging tenancy trends and macro environment

Concerns regarding inflation and continuing rental growth has resulted in high renewals and more tenants considering early lease renewals with 4-5% fixed escalators. Goodman's strong geographic exposure also highlights their ability to benefit from tenants looking to transform their supply chain and reduce transportation costs.

With the current macro situation leading to increased difficulty in ascertaining financing for development projects, we see the reduced competition and forced underinvestment into the space as very much benefiting Goodman Group, who with such low gearing are in a different financial situation to most property owners/developers.

Further, GMG continue to invest in the digital economy with concentration on supply constrained markets supporting the positive outlook for occupancy, rents, and continued development activity.

While the share price has run hard after a period of pain, we still like the long-term prospects for Goodman Group and believe it should take a position in any well-balanced portfolio.

Ideally for those looking to enter, some market-wide weakness at some point may bring the price back to a more palatable level. Either way, this should definitely be one to have on the radar, being ready to pounce on any changes to enter at discounted prices.

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