Narrow-moat Goodman GMG completed an $4 billion institutional placement and is raising $400 million via a share purchase plan (“SPP”). The proceeds will be first used to reduce debt, and fund future data center opportunities. As of Dec. 31, 2024, gearing (net debt/tangible assets) jumped to 17%, from 8% six months ago, with a North American partnership restructure. But it is still within the 0%-25% target. The equity raise will push gearing down to the low 10% range.

We recommend not participating in the SPP, provided that it is consistent with individual investing goals. Our fair value estimate is unchanged at $28 per security, which we raised from $27 per security when Goodman announced the equity raise. This increase is partly attributed to the equity issuance, priced above our valuation. The SPP issue price of $33.50 per security is the same as the institutional placement. This is a 20% premium to our fair value estimate, and about 10% higher than the share price.

We think the shares are overvalued and question the maintainability of excessive returns in data center investments in the long run, given the large quantum of capital investments piling into the sector.

Large sums of capital are required to build data centers. Cushman & Wakefield, a commercial property service provider, names Australia and Japan two of the three most expensive locations for data center development in the Asia-Pacific region. These two countries account for about half of Goodman’s global pipeline.

Competition in the data center space is intensifying, as many rival REITs and data center operators are rapidly adding new supply, and suitable locations will be harder to obtain. This could introduce price competition and erode Goodman’s returns over time.

The recent shock waves from DeepSeek also send a reminder of the dangers of high expectations with respect to a listed entity’s exposure to the fast-developing artificial intelligence industry.

A 4% increase in our fair value estimate for Goodman despite equity raise

Goodman operates an own-develop-manage business model. A typical cycle starts from acquiring a site and developing it. Completed projects are either sold or retained in one of Goodman’s funds or partnerships. Goodman typically retains minority stakes in the investment vehicles and continues to manage the sites after completion.

The group’s development-led strategy fuels growth of its asset base. As of December 2024, Goodman’s total assets under management reached AUD 84 billion, tripling the asset base of 10 years ago. Its development pipeline has also experienced significant expansion, growing to AUD 13 billion in fiscal 2024, compared with fiscal 2014’s AUD 3 billion. With a large development pipeline and an active development strategy, we expect AUM to enjoy high-single-digit percentage growth over the medium term, and the management segment to contribute almost 40% of group’s midcycle operating earnings.

The pivot toward larger-scale, higher-value projects not only expands pipeline size, but also increases project lead time. Today, an average development project takes 24 months to complete, up from 17 months in 2020. This reflects a higher percentage of data center projects, an area of focus for Goodman in the short to medium term.

Despite larger developments, capital management has remained prudent. Most development projects have capital partners involved, with high tenancy precommitment and long leases secured. The company has been rotating properties into its funds or disposing of its assets to external third parties. By doing so, Goodman is redeploying capital to new opportunities, and maintaining low leverage on its own balance sheet.

Goodman prefers urban infill locations in core gateway cities, and this adds to the appeal of its portfolio. These locations—typically in established and densely populated neighborhoods and close to end-consumer markets—are supply-constrained. Good locations, combined with structural tailwinds like e-commerce and cloud technology booms, are likely to underpin solid rent growth in the medium term.

Goodman bulls say

  • Structural tailwinds, such as rising e-commerce, supply chain transformation, and cloud technology are likely to continue having a significant bearing on industrial property demand.
  • Goodman’s large development pipeline is supported by its balance sheet capacity and the capability to attract capital partners.
  • Goodman’s investment vehicles are gaining investor inflows given their scale, strong track records, management expertise, and the ability to secure leases prior to development completion.

Goodman bears say

  • Industrial property has benefited from several years of tight supply, and rents have increased dramatically. There is a limit to how much more rents can grow, as tenants may not be able to keep paying higher rents if productivity is not going up at the same pace.
  • Rival REITs are competing to acquire industrial property and establish funds management businesses.
  • Goodman’s data center developments hinge on its ability to secure infrastructure and power. Regulatory approvals and environmental policy are a wild card.

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